Nowhere to hide! Under the "new rules" of the Federal Reserve, overseas stock and bond traders face a triple threat.

The market has truly begun to accept the new game rules of "higher interest rates will be maintained for a longer period of time," and stock and bond traders are facing a triple blow.

As of the close on Friday, September 21st, the S&P 500 fell 1.64%, marking the largest closing decline since March 22nd, with a cumulative decline of 2% over the past three days. The Dow Jones Industrial Average fell 1.08%, hitting a low not seen since July 10th. The tech-heavy Nasdaq 100 Index, on the other hand, fell 1.84%, underperforming the broader market and hitting a low not seen since June 26th after three consecutive days of decline.

London nickel hit a new low in over a year, London copper fell to a five-week low, and gold experienced its largest weekly decline in seven weeks, ending a five-day winning streak. COMEX December gold futures fell 1.40%, marking the largest closing decline since August 1st and hitting a low not seen since September 14th.

The yield on the 10-year US Treasury bond briefly approached 4.50% after the US stock market closed, hitting nearly a 16-year high since 2007, and climbing for the fifth time in the past six trading days. The yield on the 2-year US Treasury bond, which is more sensitive to interest rate prospects, briefly approached 5.20% in early Asian trading, hitting a 17-year high since 2006 for the third consecutive day.

At the same time, Bloomberg data shows that five major exchange-traded funds (ETFs) tracking stocks, bonds, or commodities have experienced their first synchronous decline in a month. In the four trading days of this week, at least five major ETFs have fallen by at least 0.8%. This synchronous decline puts these five ETFs at their third lowest level since October last year.

Analysts generally believe that the Federal Reserve's stance this week is stronger than the market expected, and the European Central Bank has also conveyed expectations that the rate hike is not over yet. Norway and Sweden have also left open the possibility of further rate hikes. Now the market is starting to adapt to the game rules of "higher interest rates for a longer period of time."

If central banks around the world persist in the view of "higher and longer" interest rates, stock and bond traders may face more pain, which could lead to an increase in real yields and further impact the returns of the stock market and sovereign bonds.

The market has to accept "longer-term higher interest rates"

On Wednesday of this week, the Federal Reserve did not raise interest rates consecutively and remained on hold for the time being, but it signaled that higher interest rates will be maintained for a longer period of time by raising rate expectations for the next two years. Federal Reserve Chairman Jerome Powell stated that the FOMC is firmly committed to bringing the inflation rate down to 2%, and the Federal Reserve has not changed its commitment to this goal. Analysis suggests that the Federal Reserve's stance is stronger than the market's, and in the case of higher long-term interest rates, real yields may rise again. Chris Gaffney, the Global Market President of EverBank, stated that the Federal Reserve is sticking to its own views, and now the market has to adapt to the Federal Reserve:

"Many investors have been waiting for the Federal Reserve to adjust its own views based on market expectations—they thought the Federal Reserve would adjust its own thinking to accommodate market expectations, but times have changed."

In their report, HSBC strategists Max Kettner and Duncan Toms stated that the current situation is "worrisome" for the market and may trigger a large-scale sell-off similar to 2022. They cited data from the past two years, stating that rising real yields often harm the stock market and sovereign bonds:

"But this time, we may not see the 'golden girl' forever like in 2019 and 2021 (the golden girl economy refers to an economic state where high growth and low inflation coexist within an economy, and interest rates can remain at a low level). Because the turning point of inflation is 'really important,' there may be some obstacles this time."

Albert Edwards of Societe Generale stated in a report that after the Federal Reserve's hawkish pause, the yield on the US 10-year Treasury bond has risen above global stock market returns, and added that the yield is currently at a multi-decade high, resembling the situation in 2007, the eve of the "everything collapse":

How much pain can the stock market endure from the rise in bond yields? Perhaps not much. Do you remember the 'Fed model'?

Not only the Federal Reserve, but the slogan of "higher rates will be maintained for a longer period of time" has now become the official stance of the European Central Bank and the Bank of England.

Despite the risks of a slowdown in the European economy, the European Central Bank raised interest rates by 25 basis points in September, bringing the deposit facility rate to its highest level since 2001. The money market expects a 30% chance of further rate hikes by the European Central Bank.

ECB President Lagarde reiterated at a press conference that inflation has remained at an excessively high level for a long time, ensuring that inflation returns to the target of 2%, and interest rates have not yet reached their peak.

Will Tech Stocks Fall from Grace Again?

Sustained high interest rates may provide support for the US dollar, but it's not good news for tech stocks, especially those with high valuations.

For years, investors' enthusiasm for tech stocks has been driven not only by innovation in software and hardware companies, but also by ultra-low interest rates, which have made the future profits promised by these companies particularly valuable. Therefore, investors are willing to pay higher prices for future returns.

Bob Elliott, CEO and CIO of Unlimited Funds, stated that the current situation is not optimistic for investors who are fully invested in tech stocks but undervalue energy stocks. In recent weeks, energy stocks have been rising. Elliott wrote on Twitter on Thursday:

"The rising valuations of technology stocks, the increase in long-term yields, and the rise in oil prices are putting pressure on this position."

According to FactSet data, the price-to-earnings ratio of the information technology industry was 25.5 times the expected earnings for the next 12 months, higher than the 20 times at the end of last year and the 10-year average of 18.5.

Among them, the expected price-to-earnings ratio of NVIDIA, the biggest winner in the technology sector this year, is 31.7 times. In addition, the expected price-to-earnings ratios of Microsoft and Apple are 29.9 times and 26.9 times, respectively.

At the same time, the decline in bonds and stocks is particularly painful for a popular strategy that allocates 60% of funds to stocks and 40% to bonds (60/40 portfolio). The 60/40 portfolio model has fallen nearly 2% since September.

With the 60-day correlation between the S&P 500 index and benchmark U.S. Treasury bonds reaching the highest level since February, the increasingly synchronized trend raises doubts about whether fixed income can hedge against the decline in risk assets.