CICC's Liu Gang: Some Thoughts on the Recent "Chaos" in Asset Performance and the Sharp Decline in US Stocks

The sharp decline in US stocks on Wednesday has attracted market attention and concerns, with the Nasdaq index falling by 3%. Tesla and Alphabet's financial reports falling below expectations have become the catalyst for this round of decline. How should we view this round of decline? What about the future of the US stock market? Why has asset performance been "chaotic" recently? Our analysis is as follows:

1. Triggering Factors: The recent sharp decline in US stocks, with significant drag from companies like Tesla, which had accumulated significant gains before. Therefore, the market is also very "picky", coupled with the manufacturing PMI falling below 50. Once the decline is significant, it is easy to trigger trading amplification, such as triggering CTA, VIX trading, etc., which are typical "patterns" in each fluctuation.

2. Larger Background: The significant gains in the US stock market were already relatively high, and rate cut expectations triggered some "big to small" rotations. The "Trump trade" also affected oil, new energy vehicles, and copper, among others.

3. Is it a recession trade? Not quite. Leaving aside the lack of significant recession pressure and signs in the US, if it were a recession trade, US bond yields should have declined, and gold should have surged, as these are the assets that benefit the most from a recession. However, gold plummeted, and US bond yields instead rose.

4. So, what exactly is being traded? Many signals are currently in chaos, with various intertwined factors and emotional influences. But a few major directions are: 1) The direction of US growth is slowing down, there is no doubt about this, so risk assets such as the stock market and bulk commodities like copper and oil will be affected. The US stock market is also affected by the current situation mentioned earlier, while copper and oil are influenced by Trump's policies. As a result, the pressure will be more pronounced;

2) But it's not a recessionary pressure, so trading based on a recession would be "overly pessimistic" on risk assets and "overly optimistic" on safe-haven assets, which could lead to issues, as demonstrated by the movements in gold and US bonds in recent days. Conversely, considering that bulk commodities and US stocks are currently weak, could this prompt the Fed to cut rates? Once rates are cut, some demand can be quickly restored.

3) It is precisely for this reason that trades solely relying on rate cuts cannot be directly and excessively extrapolated, and when rate cuts materialize, it is actually the time for these trades to "retreat and wait", while on the other hand, risk assets on the numerator side, which would normally be weak at this stage (as we have consistently advised everyone to compare with the rate cuts in 2019), provide more opportunities for subsequent recovery (adjusting down is more appropriate). Taking copper as an example, the previous rise to a high point meant that rate cuts would be postponed, so caution was necessary; a decline indicates the possibility of rate cuts and subsequent recovery, so thinking in reverse and trading half a step ahead is important.

Speaking of US stocks, our previous forecast for the second half of the year was S&P 5500, which has been clearly exceeded in the past few days. Currently, the key technical support levels are around 17,000 for the Nasdaq and 5300 for the S&P. In the short term, it may be better to consolidate and digest first. Our previous motto was "Don't buy if it doesn't fall", now we can add "Buy back when it falls too much". On the denominator side, the Russell 2000 has a greater short-term elasticity, but due to the limited interest rate cuts, caution is advised. Technology leaders and late-cycle stocks with fundamentals should still perform well in the future.

Author: Liu Gang from CICC (SAC License Number: S0080512030003), Source: Kevin Strategy Research, Original Title: "Thoughts on the Recent 'Chaos' in US Stocks and Asset Performance" by CICC Overseas