Illusion and truth — have US stocks really collapsed?

On Monday, US investors fell into extreme panic due to disappointing financial reports from major technology companies, unexpectedly weak economic data, and the failure of trading strategies linked to the yen. This also led to a wave of sell-offs in the US stock market last Monday. The three major indices fell sharply.

The July employment report fell far short of expectations. The data showed that the US economy added 0.114 million new jobs, and the unemployment rate rose from 4.1% to 4.3%. More seriously, the unemployment rate triggered the famous recession indicator — Sam's Rule. This indicator performed perfectly during past US recessions.

At the time, everyone was discussing the panic decline in US stocks and how Wall Street would deal with the “hard landing” of the economy.

Many people believe that due to the support of US economic policies, the US economy and stock market, which have been making great strides in recent years, is about to begin a recession, and even many economists “have been looking forward to this recession for a long time.”

Since the Federal Reserve began raising interest rates sharply in 2022, it has kept interest rates between 5.25% and 5.5% in the last year. The Federal Reserve's goal is very clear: to reduce the inflation rate while preventing the economy from falling into recession and achieving a soft landing in the economy.

However, expectations of a recession in the US economy have caused the market to panic. Investors called for the Federal Reserve to cut interest rates urgently, and criticized the US economy for falling to this point due to the slow response of the Federal Reserve.

The words “collapse” and “explosion” appeared in various media and social platforms in various countries.

And last Thursday's economic data put an end to the topic of America's economic recession.

According to data released by the US Labor Department on Thursday, the number of people applying for unemployment benefits for the first time fell by 0.017 million the week before, to only 0.233 million, a sharp drop from the highest level in 11 months just the previous week.

Chris Zaccarelli (Chris Zaccarelli), chief information officer of the Union of Independent Advisors, immediately stated in a report that initial jobless claims data “may give a boost to the market.”

“The signs of a slowdown in economic growth are obvious to all concerned, but considering that the US GDP is still growing at 2.8%, it's hard to believe that the recession has begun. We are proceeding with caution, but think the panic that began earlier this month has been exaggerated”.

Immediately, US stocks began a violent rebound pattern last Thursday. Among them, the S&P 500 index surged 2.3%, setting the best single-day performance in the past two years.

At the end of last week, let's take a look. Apart from the VIX, which represents the barometer of stock market sentiment, the S&P 500 and NASDAQ have basically not changed, and now the VIX has fallen from a high level during the year to close to the long-term average.

The Chicago Board Options Exchange Panic Index (VIX), also known as the “Panic Index,” is a market index created and maintained by the Chicago Board Options Exchange (CBOE). VIX measures the implied volatility of S&P 500 (S&P 500) options and is one of the risk indicators widely used in the global market. As VIX reflects investors' expectations of stock market volatility over the next 30 days, it is viewed as a barometer of market sentiment.

When the VIX Index rises, it usually means that investors expect the market to face greater volatility and increased risk, so it is called the “Panic Index.” Conversely, when the VIX index falls, it indicates that market sentiment is more stable and investors expect less volatility in the future.

Investors and institutions often use VIX to manage risk. By trading derivatives such as VIX futures and options, investors can hedge against market risks or use changes in volatility to carry out arbitrage transactions.

Although VIX is essentially a volatility indicator, its changing trends are often closely related to market trends. For example, VIX usually rises before the market falls sharply, reflecting a heightened sense of fear in the market.

VIX Futures: CBOE offers VIX futures contracts that allow investors to trade the VIX Index to manage expectations of market fluctuations.

VIX Options: Investors can also trade through VIX Options and use volatility strategies to profit.

VIX ETFs: Some exchange-traded funds (ETFs) are built on the VIX Index, and investors can invest in the VIX Index indirectly through these ETFs.

You can trade the VIX Index on some US stock and derivatives trading platforms, such as Tiger Securities, BiyaPay, and Futu Securities.

The first step in cultivating strength as an investor is to spend a minute thinking about what the media shows you and what the actual data actually looks like. Columnist Jason Zweig gave two examples:

News headline “The Dow Jones Index fell 1000 points in a single day”.It may seem scary, but even people who don't invest in US stocks only need to take a look at the denominator behind it. In fact, the Dow Jones Index closed at 39737.26 the day before yesterday. In other words, the “terrible” decline of 1,000 points in a single day was just a 2.6% drop. Of course, the 2.6% single-day drop is indeed slightly larger than the relatively calm market in the past period, but does it sound much better than “1000 points”?

It sounds like investors in the US have lost confidence in the market and economy and are selling off in exchange for the safety of their funds. But what about the truth? We only need to put it in a data context to quickly understand what is remarkable about this 1 billion US dollar. According to the official website of the US Bureau of Statistics, there are about 0.13 billion households in the US. According to the Federal Reserve's survey data, about 58% of US households own stocks through various funds, ETFs, direct investments, etc., in other words, about 0.13 billion* 58% = 75 million households own shares. Assuming this 1 billion dollar data is correct, the average household with 1 billion/75 million shares “sold” 13 US dollars. According to the Federal Reserve statistics, the median amount of shares owned by US households is 0.052 million US dollars. In other words, on August 5, American households sold an average of $0.13/0.052 million = 0.025% of their shares. It's really amazing!

We've also seen a few similar cases in the past week, and I'll share two of them with you:

News headline: “Recession fears set off “Black Monday,” and the 7 Tech Sisters collectively evaporated 1.3 billion dollars in market capitalization at the beginning of the session.”The sudden evaporation of 1 trillion US dollars is amazing, but it takes a second to discover that the overall market value of the S&P 500 index, where the 7 Tech Sisters are located, is around 45 trillion. In the past two years, the US stock market, which has been well known to domestic investors, is the Technology 7 Sisters, so from the Chinese media's perception, US stocks can simply be equated with the 7 Technology Sisters. However, there are thousands of listed companies in the US stock market, more than 2,200 on the NYSE, and more than 3,400 on the NASDAQ. In addition to its 7 sisters, the S&P 500 also has 493 companies covering various industries. Technology stocks are not the same as the market as a whole.

News headline: “US credit card debt broke a record, reaching 1.14 trillion US dollars. Experts say ordinary people are unable to make ends meet.” This news is based on the latest data for the second quarter released by the Federal Reserve, and “experts” were also sought to comment. It came from major US financial media. Seems pretty believable. A picture of the Federal Reserve is even attached (below). It is true that ordinary Americans are living in a deep and hot situation; where there is still a soft landing, it is clear that the economy is about to collapse.

If you only look at the horizontal coordinates, you'll see that the starting point of this map is 2018, so the center of the map is three years since the epidemic. Three years after the epidemic, the US government threw money, and ordinary people's credit card and other debts experienced a major decline. Looking at it this way, there has been a sharp rise in credit card debt from 2021 to now. Take another look at the vertical coordinates. The starting point is 750 billion, not 0. Of course, drawing a picture like this looks even more amazing. The Federal Reserve's data did not start in 2018. The picture below is from the Federal Reserve's original data, from the first quarter of 2004 to the second quarter of 2024. Has credit card debt reached a record high? Yes. But just by correcting the horizontal and vertical coordinates, doesn't it seem that “deep and hot”?

If you add one more chart to see the increase in disposable income of ordinary Americans during the same period, the data source also comes from the Federal Reserve. It turns out that during the same period, revenue growth also seemed very impressive.

Do a simple calculation,

From 2004 to 2024, the disposable income of US residents increased by 137%, and credit card balances increased by 65% during the same period, which did not seem to be that intense.

The four examples described in this article all occurred in the first week of August 2024. There were so many seemingly correct and thrilling articles in just one week; in fact, they were just small articles that attracted attention, and we were talking about all articles that quoted correct data, let alone those pure little essays.

Well, in the age of information explosion, investors are faced with a large amount of complicated and even contradictory information, especially on financial media and social platforms. Therefore, how to clear the media fog and move towards rational investment has become a key challenge for many investors. Here are some effective strategies and methods,

Financial markets are volatile, and the media often amplify short-term market fluctuations, creating anxiety or excessive optimism. Focus on long-term investment goals and strategies without being disrupted by short-term market fluctuations. Choose companies with long-term growth potential to invest and focus on analyzing company fundamentals rather than short-term market sentiment fluctuations.

Develop a clear investment plan based on personal financial circumstances, risk tolerance, and long-term goals, and strictly abide by it. Reduce risk caused by single asset or market fluctuations through diversification of investments. Avoid investing all of your money into a single stock or industry.

When obtaining information, you can use tools such as RSS and email subscriptions to filter out useful and trustworthy sources of information for yourself. Focus on fundamental factors such as the company's financial statements, industry trends, and macroeconomic indicators, rather than market rumors or media hype.

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Yahoo Finance Yahoo Finance is a free online tool that provides real-time data, news, analysis, and portfolio tracking for markets such as stocks, bonds, and commodities. User-friendly interface, extensive market data coverage, free to use.

Zacks provides stock research reports, rankings, and recommendations to help investors identify potential stock investment opportunities. Its rating system is a reference standard widely used by investors. Provide stock ratings, research reports, and investment advice.

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