How did the historical core asset bubble in the US stock market come to an end?

The U.S. stock market bubble finally faces market fragility and high levels of monetary tightening, timing is crucial to watch for events.

Recently, there has been significant volatility in the U.S. stock market, and the market has at times compared this round of market trends to historical bear markets such as the dot-com bubble, raising concerns about the risk of whether the current U.S. stock market has peaked, with a bubble that may burst. Our constructed U.S. stock market top indicator system is currently at 57%, with the system lighting up >=50% before 9 bear markets in the U.S. since 1970, indicating that the U.S. stock market may have been in a relatively optimistic range before. Therefore, we review the beginning and end of the two core asset trends in the U.S. stock market: ① Market fragility is high at the end of the trend; ② The end of the bubble occurs at a high level of monetary policy tightening; ③ Special events are the trigger for the bubble to burst; ④ Relative profit trends run through the beginning and end of the two core asset bubble trends; ⑤ Structural funds entering the market and external shocks affecting structural risk preferences are important factors in market interpretation.

Key Points

Bubble Formation: New and old energy conversion, industry and monetary policy, and structural liquidity are the main factors

In terms of industrial competitiveness, the U.S. was in a period of transition between old and new economic forces: during the "Nifty Fifty" period, the global competitiveness of the U.S. steel and automotive industries began to decline, while under the U.S. government's "Great Society" plan, the consumption era rose comprehensively; during the dot-com bubble period, the U.S. government focused on developing new forces and ushered in the internet revolution. In terms of industrial policy, corresponding industrial and administrative policies were introduced during both core asset bubble periods. From a monetary policy perspective, both rounds of trends were catalyzed by macro liquidity from relatively loose monetary policies. In addition, both trends saw structural funds entering the market to fuel the bubble: during the "Nifty Fifty" period, pension funds entering the market led to better performance of asset markets with high and stable ROE; during the dot-com bubble period, foreign funds entering the market tended to choose high-growth and scarce U.S. tech stocks.

Market Structure: Market fragility was high at the end of both bubble bursts

Based on 14 dimensions including macro conditions, U.S. stock valuations, microstructures, technical & sentiment indicators, historically, in at least 9 technical bear markets in the U.S. since 1970, the indicator system has lit up at least 50%. Among them, at the peaks of the two core asset bubbles (the 1973 oil crisis lit up at 50%, the dot-com bubble in 2000 lit up at 69%), U.S. stock valuations (measured by the rolling 5-year percentile of CPI year-on-year + SPX P/E ratio) were relatively high, and during the dot-com bubble period, U.S. stock valuations relative to global valuations, indicators such as retail investors, leverage, derivatives, SPX top 10 company concentration, were all at high levels. The current U.S. stock indicator system has lit up about 64%, and dimensions such as technology attributes, concentration, leverage ratio, global fund inflows, are somewhat similar to the dot-com bubble period.

Liquidity: The end of both core asset bubbles occurred at high levels of monetary policy tightening

Monetary policy tightness or looseness has shaped the key external environment for the interpretation and bursting of the two market bubble trends. At the start of the trends, during the "Nifty Fifty" period, the excessive loose monetary policy due to political factors (short-term interest rates were negative at one point) led to market bubble formation, and the significant tightening to counter the second inflation (aided by the oil crisis) became the key external environment that restricted and burst the bubble; During the bubble period of the dot-com era, the market liquidity was relatively excessive due to the precautionary interest rate cuts against financial risks, and the key external environment to burst the bubble was the subsequent inflation (gradual recovery of emerging markets from the Asian financial crisis) and interest rate hikes (about 175 basis points). In addition, the end of two core asset bubble rallies both occurred after rapid tightening and before turning to loose monetary policy. In cases where the economy subsequently experienced stagflation/recession, interest rate cuts could not save the decline of the U.S. stock market.

Event shocks are the trigger for the bursting of the bubble, with relative profit trends running through the beginning and end of the two rallies

Event shocks are the key triggers for the bursting of the bubble: during the "Nifty Fifty" era, the fourth Middle East war and the oil crisis were important triggers for establishing the end of the rally, while negative media coverage of tech stock profits and key unfavorable developments in the Microsoft antitrust case during the dot-com era led to the bursting of the bubble. Relative profit trends run through the beginning and end of the two core asset bubble rallies. During the "Nifty Fifty" era (1965-1973), against the backdrop of the transition of economic momentum in the U.S. and the "Great Society" program, consumer stocks demonstrated a relative advantage in profit growth and high and stable ROE, which was later suppressed during stagflation and price control policies; during the dot-com era (1993-2000), in the upswing phase of the internet industry lifecycle, the profit growth of the S&P 500 information technology sector remained strong for a long time compared to the S&P 500.

Main Content

U.S. stock market top indicator system shows a current lit percentage of about 57%

Recently, multiple U.S. stock valuation, sentiment, and fund indicators point to the U.S. stock market being in a short-term or optimistic range. Based on macro conditions, valuation levels, micro structures, technical & sentiment indicators, etc., we have constructed a U.S. stock market top indicator system. Historically, in the 9 technical bear markets (decline of 19.5% or more) that occurred in the U.S. after 1970, related indicators were lit at least 50%. The current U.S. stock market indicator system has lit about 57%, and dimensions such as technology attributes, concentration, leverage ratio, and global fund inflows have some similarities to the dot-com bubble period.

In terms of macroeconomics, the current U.S. economic data has significantly cooled down, with only 114,000 non-farm payroll additions in July, well below the Bloomberg consensus expectation of 175,000, and the unemployment rate of 4.3% higher than market expectations. It has reached the critical value of the Sam Rule (the U.S. three-month unemployment rate moving average minus the lowest unemployment rate of the previous 12 months, with the resulting value exceeding 0.5%), and the market is concerned about a major recession, with recession trades being extreme. Historically, the Sam Rule was triggered around the U.S. stock market peaks in 1980, 1990, 2007, and 2020, with confirmations of the top of the bear market in 1973 and 2000 occurring approximately half a year later (with a long lag). However, in 2022 (Fed tightening), 2018 (Fed tightening), and 1987, there were no clear triggers of the Sam Rule

In terms of monetary policy, the United States is currently in a phase of tight monetary policy at a high level where rapid rate hikes have ended and rate cuts have not yet begun. Historically, the U.S. stock market has often faced "danger" at this stage. Bear markets in U.S. stocks occurred in 1968, 1973, 1980, 2000, 2008, and 2018 at this stage, and the current situation is no exception, indicating a certain level of risk for the U.S. stock market. Historically, in 1990 (rate cut continuation), 2020 (pandemic impact), and 2022 (Fed tightening), the monetary policy environment conditions were not met.

Regarding credit risk, changes in credit spreads often reflect investors' expectations for the future economy and the liquidity situation in the short-term market. When the credit spread between high-yield bonds and investment-grade bonds rises significantly to above the 99th percentile on a month-over-month basis, it signals a crisis and a market top for U.S. stocks. This indicator was triggered during the bear markets in 2007 and 2020. It was not triggered in 2018, and in 2022, it was triggered with a lag and not significantly (only one trading day lit up). Although the market spread rose by 32 basis points last week, it has not yet reached this indicator.

In terms of offshore U.S. dollar liquidity, we use the TED spread 12MMA's recent one-week change relative to the past three months' change to calculate the 99th percentile as a critical value. When this value exceeds, it indicates tight offshore U.S. dollar liquidity, an increase in investor risk aversion, and so far, the current peak has not reached this indicator, suggesting a low possibility of a global liquidity crisis. Historically, in 2018, the offshore U.S. dollar liquidity risk during the bear market was also low.

Regarding valuation indicators, taking the ERP calculated by the Shiller P/E ratio as an example, historically, when it exceeds the rolling downward 1.5 standard deviations, it indicates that U.S. stocks are in a high valuation range. In July, the top of the U.S. stock market Shiller P/E ratio ERP has dropped below the rolling 1.5 standard deviations. Historically, in 1973 (oil crisis), 1990 (Gulf War), and 2020 (pandemic impact), this indicator did not significantly light up. In 2022, it lit up with a lag approximately three quarters after the bull market peak.

When combining U.S. stock market valuation and U.S. inflation data, historically, when the rolling 5-year percentile of (CPI YoY + SPX P/E ratio) exceeds 80%, it indicates that the market has entered a significantly overbought state, and subsequently, there is a concern that the Fed may raise rates to curb inflation, leading to a decline in U.S. stock market valuation. This indicator is currently not lit up, indicating that the market's optimism is partly driven by optimistic rate cut expectations and that inflation risks are relatively low From a historical perspective, the indicator triggered a lag in the bear market in 2007, while in this round, it has benefited from the downward trend in inflation and has not yet been triggered.

From a relative valuation perspective, comparing valuations with other global markets can to some extent reflect the relative participation of "non-US funds". If the valuation of US stocks is significantly higher than other markets, the vulnerability of non-US markets may also become a key factor in the US stock market trend (affecting from the perspective of structural liquidity). Historically, this indicator did not light up in the bear markets of US stocks in 2007 and 2020.

From a micro-structural indicator perspective, the concentration of market capitalization in US stocks is also at a relatively high level. We measure the structural concentration of the US stock market by the proportion of the total market value of the top ten components of the S&P 500 to the total market value of all components of the S&P 500, and find that this indicator is already more than 1.5 times the standard deviation. When this indicator exceeds this standard, it often corresponds to a more fragile micro-structure of US stocks, and once trading reverses, it can easily trigger significant pullback and stampede risks. Historically, this structural issue was not triggered in the bear market of 2007.

From the proportion of individual stock valuation percentiles close to extreme values, this indicator has not yet lit up, indirectly reflecting that the current US stocks are still in a structural trend and have not spread to the overall characteristics. We use the proportion of companies in the SPX component stocks with valuation (PE or PB) 5-year rolling percentile > 90% as a measure. The average levels at the peaks of the past 5 bull markets were approximately 18%, 27%, while on July 16th, the values at the US stock peak were 7.2%, 22.2%, still not reaching the average levels of the previous 5 bull market peaks.

From a technical indicator perspective, US stocks are also showing signs of being overbought. Historically, when the percentage of companies in the SPX whose stock prices are above the 200dma is higher than 75%, it indicates that US stocks have entered an overbought state. The US stock peak on July 16th had already lit up. It is necessary to closely monitor whether this indicator will quickly fall back to around 45%. If so, it may indicate that the time and space for the subsequent pullback may be relatively large, rather than just a small market adjustment. Historically, only in the 2000 market, due to the long duration of the bubble and the strong trend, this indicator lit up relatively early, with a time interval slightly over a year to confirm the peak.

The sentiment of retail investors is also an important overbought indicator. We measure the sentiment of retail investors by subtracting the proportion of those who believe the market will rise from those who believe it will fall in the AAII Sentiment Survey. Historically, when the upward trend exceeds 1.5 times the rolling standard deviation, it often means that the U.S. stock market has entered the overbought zone, with the earliest signal flashing three quarters in advance. In April this year, this indicator touched the area of 1.5 times the rolling standard deviation. Historically, in 1990 (Gulf War), 2007 (financial crisis), and 2020 (pandemic impact), this indicator did not flash a signal.

Leveraged funds have also reached the flashing zone. Historically, the financing leverage ratio of leveraged funds in the U.S. stock market is also an important overbought indicator. Except for the period from 2004 to 2006 when the indicator flashed but did not trigger a signal due to a decline in volatility, when the current upward trend exceeds 1.5 times the rolling standard deviation, it also means that the U.S. stock market has entered the overbought zone. The signal of this indicator is currently flashing, and its absolute value is at a historical high. Historically, only in 2020 (pandemic impact) did this indicator not flash a signal.

However, the short interest data has not yet met the overbought signal. Historically, when the Put/Call trading ratio of the U.S. stock market exceeds 1.5 times the rolling standard deviation, it also means that the U.S. stock market has entered the overbought zone. However, this indicator has not yet flashed a signal, which may indicate that short interest may not be a key variable in this round of the market.

The similarities and differences between the two "core asset bubble" market trends in the U.S. stock market

The rise and fall of the "Nifty Fifty" bubble

The economic background and economic cycle that formed the "Nifty Fifty" bubble

The market generally believes that the heyday of the "Nifty Fifty" began in January 1970 and ended in October 1973. However, we believe that since 1965, the "Nifty Fifty" has shown significant excess returns compared to the SPX. Overall, the background of the "new and old energy conversion" in the U.S. economy, economic and monetary policy cycles, and external shocks (oil crisis) collectively shaped the prosperity and collapse of the first "core asset bubble" in the history of the U.S. stock market.

1960s-1970s: The U.S. Economy Faces "Transition of Old and New Forces"

Starting from 1966, the growth rate of factor productivity (technological progress) in the United States began to slow down significantly, marking the phase of "transition of old and new forces" for the country. From the perspective of pillar industries, the competitiveness of the two major pillars of the U.S. manufacturing industry, steel and automobile industries, began to decline, showing signs of decline. The intensive steel and automobile industries in the Great Lakes region later formed the famous "Rust Belt".

In terms of sector structure, during this phase, the U.S. service industry gradually replaced the manufacturing industry as the core of the U.S. economy and employment. Personal consumption has replaced private investment as the primary factor driving U.S. GDP.

Economic Cycle: Fiscal Stimulus Leads to Inflation → Insufficient Tightening of Money Supply Leads to Secondary Inflation → Leading to Stagflation

Phase One: "Great Society" Plan Leads to Fiscal Expansion (1965-1970)

In the 1960s, against the backdrop of complex international situations such as the U.S.-Soviet confrontation, the Vietnam War, and various new social ideologies emerging from the post-war baby boomer generation, internal contradictions in American society became more intense. In this context, U.S. Presidents Kennedy and Johnson attempted to launch the "New Frontier" and "Great Society" plans to promote social reforms. Economically, they adopted the tax reduction proposals of the "New Economics", implemented a long-term deficit fiscal policy, and focused on poverty alleviation. Starting from 1965, a series of social reforms were officially implemented, and the loose fiscal policy gradually led to economic prosperity in the United States.

However, excessive fiscal stimulus also led to inflation in the United States. To curb inflation, starting from 1968, the Federal Reserve continuously raised interest rates, and the government also initially adopted price control policies to limit inflation. However, this only stabilized inflation at a high level in the United States, at the cost of economic slowdown. In addition, under the fixed exchange rate system (gold standard), with significant depreciation pressure domestically in the United States, European countries purchased large amounts of dollars (issuing local currency reserves) to prevent their currencies from appreciating against the dollar, thereby transmitting U.S. expansionary policies globally. This led to a sustained global inflation trend from 1967 to 1972, and also formed the demand-side reasons for the first oil crisis and the subsequent rise in oil prices. Adding to the troubles, as the U.S. gradually lost its industrial competitiveness, it had to increase imports (even resulting in the first trade deficit in 1971) to meet domestic demand, which further transmitted international inflation back to the domestic economy Stage Two: Federal Reserve Forced to Ease Monetary Policy Under Political Pressure (1970-1972)

From 1970 to 1972, the United States experienced many political events: the 1970 midterm elections of the Nixon administration, the US announcement of the decoupling of the US dollar from the gold standard in 1971, and the 1972 US presidential election. At that time, the Nixon administration, which suffered defeat in the Vietnam War, urgently needed to restart economic growth to rally public support. Under this pressure, the Federal Reserve was forced to once again adopt loose monetary policy in this stage, with the US discount rate remaining low throughout (for discount rate data, please refer to the description of monetary policy in section 3.3 later), laying the groundwork for a broad re-inflation trend both domestically and internationally. Loose monetary policy formed an economic feedback loop through: money (EFFR measuring the actual effects of price policy) → credit (M1 yoy, measuring credit derivatives) → orders → production → inventory → channels for corporate profit, driving a new cycle of demand and inflation.

Stage Three: Second Rate Hike Ends Core Asset Bubble Market, Oil Crisis Drives Stagnant Inflation Environment (1972-)

After the real interest rate of monetary policy turned negative twice in 1971 and 1972, the second inflation trend in the United States had already formed by 2Q73. Despite the steeper rate hikes by the Federal Reserve after the 1972 presidential election (November 1972), it did not help control inflation. Subsequently, the "Nifty Fifty" market ended in October 1973, coinciding with the oil crisis in the same month.

For the purpose of inflation control, the Nixon administration once again implemented a large-scale "price control" policy in 1973—not only controlling commodity prices but also limiting the growth rate of labor wages, although imported goods were not included in the price control scope. Based on this, the oil crisis further pushed up inflation, gradually shifting the US macroeconomic environment towards a stagnant inflation scenario. With limited income combined with cost pressures, the real purchasing power of the US household sector was significantly weakened Profit trend advantage has always run through the beginning and end of the relative market

The relative profit advantage has always run through the beginning and end of the Beautiful 50 market. Overall, the profit growth rate of the Beautiful 50 was consistently higher than the S&P 500 from 1964 to 1972. Furthermore, looking at it by industry, except for information technology, the profit growth rate of Beautiful 50 component stocks in other industries is higher than the overall profit growth rate of all US stocks in that industry. For information technology, although the performance advantage is not obvious, the profit certainty of these industry leaders is higher than that of small and medium-sized stocks in the industry. In the 1960s, when technology stocks in the US were listed continuously and various concepts emerged, stock selection in this era was easier than other securities.

The end of the "Beautiful 50" market under the high phase of monetary policy tightening and external shocks

Restrictive monetary and price control policies, along with external shocks (oil crisis), were the catalysts for the end of the Beautiful 50 market. Firstly, restrictive monetary and price control policies are important environmental factors that gradually slow down the momentum of bubble rise and even turn towards collapse. Secondly, the oil crisis greatly enhanced the market's expectations of the events and intensity of restrictions, turning the market from a "possible short-term pullback" directly into a medium-term adjustment. In terms of market profit expectations, these factors indeed limited the profit capabilities of enterprises and the consumption capabilities of residents, triggering concerns in the market about the future profit capabilities of the Beautiful 50. In terms of valuation, restrictive monetary policies also killed the valuation of the Beautiful 50 with high valuations, high momentum, and strong chip concentration. Under the double impact, the Beautiful 50 reached a turning point at the top.

In terms of monetary policy, the end of the Beautiful 50 bubble (judged by the formation of the second peak in the M top, i.e., before the crash) occurred at a high position of tight monetary policy (after rapid rate hikes and before the start of rate cuts) Considering that the Federal Reserve had not yet systematically disclosed the target range for the federal funds rate at that time, we used the data of the U.S. discount rate as the price basis for measuring monetary policy. At the end of 1972 and the beginning of 1973, the U.S. discount rate rose again, ushering in the prelude to this round of contractionary monetary policy, during which the equity market also retreated. Subsequently, the continuous rapid rise of the discount rate ended at the end of August and the beginning of September 1973, with the beautiful 50 establishing the second peak of the M top in October (corresponding to the oil crisis), marking the end of the market trend. After the bubble burst, in order to curb inflation, the U.S. discount rate rose slightly again to the high point of this round in March-May 1974, and then began to decline in November 1974, ending the cycle of monetary policy tightening.

Structural risk preference drives market favor for "certainty premium"

Firstly, the slowdown in the pace of U.S. factor productivity advancement has shifted market structural preferences from technology growth to the more profitable beautiful 50.

Secondly, at the alpha level, the first round of institutionalization of U.S. stocks dominated by pension fund structured entry provides structural liquidity for assets with certain ROE. Industry selection also favors industries with high and stable ROE.

The rise and fall of the dot-com bubble

The economic background and economic cycle that formed the dot-com bubble

It is widely believed that the heyday of the dot-com bubble began in 1998 and ended in August 2000 (also corresponding to the rapid increase in the valuation of U.S. technology stocks, with the market ending at the second peak of the S&P 500 Information Technology Absolute Price M top and the high point of the SPX index). However, we believe that since 1993, the U.S. technology sector has gradually shown excess returns compared to the SPX. Overall, the combined life cycle of the new economy industry in the United States, along with economic and monetary policy cycles, shaped the prosperity and collapse of the second "core asset bubble" in U.S. stock market history.

In the economic turmoil of the savings and loan crisis in the 1980s, the U.S. economic growth rate was not high for a long time. To promote economic growth, the Clinton administration proposed an economic revitalization plan in 1993, aiming to drive the economy through strong investment. The U.S. government viewed the development of information technology as a new point of economic growth and introduced a series of industrial policies. Against the backdrop of industrial policy promotion and technological progress, the share of the U.S. information manufacturing industry in GDP also continued to rise Under the background of technological advancement, the Federal Reserve also has the ability to keep the real policy interest rate (EFFR minus core PCE year-on-year) at a high level to maintain the long-term stability of the U.S. economy from 1993 to 1998. Good economic data trends have also stabilized market expectations and policy environment, providing a good external environment for industrial and technological progress.

Subsequently, under the influence of the Asian financial crisis and the Russian ruble crisis, the Federal Reserve, in order to prevent financial risks, conducted three interest rate cuts in September to November 1998, releasing liquidity. At that time, against the backdrop of significant differences in the domestic and international economic environment, international capital accelerated inflows into the U.S. market, further exacerbating liquidity overflow and strengthening inflationary pressures. Subsequently, as the international market gradually recovered from the Asian financial crisis and commodity prices gradually rebounded, the U.S. faced imported inflationary pressures. To control secondary inflation, the Federal Reserve raised interest rates again from June 1999 to May 2000 (by about 175 basis points), bursting the dot-com bubble. Subsequently, foreign capital significantly reduced their positions in the U.S. market, increasing valuation pressure on U.S. technology stocks. Against the backdrop of gradually weakening profits, the dot-com bubble ended, and U.S. stocks suffered a double blow.

The advantage of profit trend has always run through the relative market situation

The advantage of profit trend has always run through the relative market situation. From 1993 to 1999, for the majority of the time, internet companies demonstrated a relative profit advantage over the SPX as penetration rates rapidly increased (both first and second derivatives were positive). By 4Q99, tech stocks began to show signs of weakening profit growth in the preliminary third-quarter reports. Subsequently, poor product sales during the 1999 Christmas holiday season temporarily exacerbated market concerns about the fundamentals of tech stocks. At the same time, Barron's published "Burning up," which studied over 200 internet companies and found that 51 network companies were facing cash flow depletion. The market began to question the sustainability of long-term profit growth for high-tech companies like internet companies. Subsequently, as the internet industry lifecycle entered a deceleration phase (refer to the report on 2022.3.22), tech stock profit growth slowed down, and the reversal of relative profit capabilities drove the structural bull market reversal The industry life cycle was the core driving force behind the early performance of US technology stocks at that time. Using the number of households with internet access per hundred households to represent internet penetration rate, by the end of 1992, the internet penetration rate in the United States was less than 5%. By the end of 2007, the penetration rate exceeded 200%. The US internet industry went through four stages of penetration rate improvement:

1Q93 Preliminary stage (penetration rate <5%): After the end of the Cold War between the US and the Soviet Union, the internet gradually transitioned from military use to research institutions. In the 1980s, the internet circulated and was applied in academia in the United States, with email beginning to be widely used. At this time, individual users started using the internet, and email became a tool for communication and exchange. During this stage, industry valuations were greatly influenced by market conditions.

2Q93-3Q95 Inflection point (penetration rate 5-20%): In 1993, the Clinton administration announced the implementation of the "National Information Infrastructure" and the development of the "Information Superhighway." At the same time, the birth of the World Wide Web ushered in the era of Web 1.0, and the establishment of the pioneering browser company Netscape accelerated the commercialization boom of the internet. During this stage, the internet quickly reached the masses, industry trends gradually became clear, and as the penetration rate accelerated, the relative valuation of the S&P 500 information technology industry (measured by ps ttm) increased from 0.9x to 1.6x.

4Q95-3Q99 Acceleration period (penetration rate 20-90%): After the internet experienced the first wave of enthusiasm and the penetration rate exceeded 20%, it quickly ushered in a capital investment boom exclusive to the internet industry. During this period, US venture capital rapidly expanded. According to the NVCA annual report, in 1999, over 50% of US venture capital funds were invested in the booming internet industry. At the same time, many future internet giants, such as Amazon, Google, and Microsoft, emerged, making the industry more commercialized and diversified compared to the previous stage, with more intense internal competition. The industry's relative valuation center basically remained around 1.6x.

4Q99-2Q07 Deceleration period (penetration rate >90%): The industry penetration rate slope slowed down, but after the rapid growth in the previous two stages, the fervent capital continued to pour in. The funds flowing into the secondary market far exceeded the growth rate of new users and industry performance, leading to the expansion of the internet bubble. The industry's relative valuation peaked at the beginning of the new century, then rapidly fell back to around 1.6x within a year and a half. Subsequently, until mid-2007, when the US internet penetration rate approached saturation, the relative valuation of the S&P 500 information technology industry remained around 1.6x. During this stage, the market experienced significant capacity clearing, with more concentration among top players benefiting from overseas expansion—accelerating the global internet penetration rate The impact of the event has caused the bubble to start shaking, bursting at the high level of monetary policy tightening.

Monetary policy is a key factor in the relative valuation trend of technology stocks towards a bubble in this round. After the 1998 Russian ruble crisis triggered turmoil in Long-Term Capital Management, considering smoothing financial risks, the Federal Reserve chose to make a slight interest rate cut starting in September 1998. At the same time, US technology stocks gradually showed a bubble market under the liquidity boost. Subsequent interest rate hikes were also a key external factor in the burst of the technology stock bubble. The Fed chose to raise interest rates again in June 1999 to curb secondary inflation, raising rates from 4.75% to 6.5% by May 2000. The rapid rise in rates at high levels, against the backdrop of technology stock profit growth showing fatigue, put pressure on the valuation of technology stocks. Eventually, as the Fed's rapid interest rate hike phase ended and monetary policy entered a tight high phase, US technology stocks began a trend of "killing valuation" at the end of August and early September 2000.

On the event impact side, firstly, the market's growing concerns about the fundamentals of internet companies gradually formed a consensus, serving as an important trigger for the burst of the bubble (forming the highest point of this round of the market and the first peak of the M-top). On March 20, 2000, an article "Burning Up" in Barron's described the current situation of internet companies ("Among the 207 internet companies surveyed, 71% were unprofitable, 51 companies would run out of cash within 12 months, even the star company Amazon could only sustain its cash flow for 10 months, many internet company founders and early investors were trying their best to cash out. The funds flowing from the old economy to the new economy were quickly exhausted, and internet companies that had no money to burn and no money to earn were about to fall from grace."), which made this concern explicit and became an important factor driving net selling by investors.

Secondly, negative developments in the Microsoft antitrust case severely hit market sentiment, further pushing the bubble to burst. In April 2000, Federal Judge Thomas Penfield Jackson stated that evidence collected proved that Microsoft did engage in monopolistic behavior and was prepared to forcibly split Microsoft, pushing market sentiment in the internet sector to new pessimistic heights.

Liquidity distribution drives changes in structural risk preferences

Structural liquidity is mainly reflected in: mutual funds leading the way, followed by foreign capital. For mutual funds, the 1990s saw a "main uptrend" in mutual fund development in the US market, with the proportion of funds from mutual institutions in US stocks rapidly rising from single digits during this period. For foreign capital, firstly, due to the temperature difference between domestic and foreign economies, foreign capital poured into US stocks (especially US technology stocks, which are scarce assets for foreign capital), serving as one of the drivers of the shift in structural risk preferences; secondly, after the burst of the tech bubble, with the Fed cutting interest rates, funds in the US market shifted to the financial real estate sector, forming a new "group direction," indirectly driving the reversal of the relative returns of US technology stocks

Appendix

Author: Wang Yi S0570520060001, Zhang Dian S0570123030057, Source: Huatai Ruisi, Original Title: "Strategic Depth: How Did the Core Asset Bubble in the History of US Stocks End?"