Perhaps few people could have imagined at the beginning of last month that, after the 'Black Monday' and 'Black Friday' triggered by the poor non-farm payroll data, the US market would still make a full recovery in August; The US market has not seen scenes like this for 17 years: ETFs tracking government bonds, corporate credit, and stocks have risen continuously for four months, the longest streak since at least 2007.
Perhaps few people could have imagined at the beginning of last month that after the "Black Friday" and "Black Monday" triggered by poor non-farm payroll data, the US market would still be able to fully recover in August, which has also boosted the confidence of many local cross-asset investors...
The US market has not seen scenes like this for 17 years: ETFs tracking government bonds, corporate credit, and stocks have risen continuously for four months, the longest streak since at least 2007.
Meanwhile, historical statistics compiled by Ned Davis Research over the past 70 years show that...$S&P 500 Index (.SPX.US)$It has risen 25% in the past 12 months. Prior to the first rate cut in the Federal Reserve's easing cycle, US stocks had never experienced such a large increase!
Clearly, despite lingering doubts about the economy, inflation, and how central bank officials will respond, traders are not backing down. The bond market had already factored in a series of rate cuts before the Fed began to take action, default risk indicators were declining, and the soaring stock market reflected resolute bets on a soft landing.
Miraculous rebound
Let's take a look back at the performance of various markets in the past month: $S&P 500 Index (.SPX.US)$ In August, the cumulative increase was 2.3%, with ETF funds tracking long-term treasuries up 1.8% and investment-grade bonds up 1.5%. Four major asset class ETFs (SPY, TLT, LQD, HYG) all rose by at least 1% that month, with the US stock market alone adding over $1 trillion in market cap.
SPY, TLT, LQD, HYG respectively represent $SPDR S&P 500 ETF (SPY.US)$ bonds. $iShares 20+ Year Treasury Bond ETF (TLT.US)$Please use your Futubull account to access the feature.$Ishares Iboxx $ Investment Grade Corporate Bond Etf (LQD.US)$Please use your Futubull account to access the feature.$Ishares Iboxx $ High Yield Corporate Bond Etf (HYG.US)$ code.
These are all performances where cross-asset longs have shown their strength. They firmly believe that Fed Chairman Powell can lower interest rates while achieving a soft landing of the economy. Of course, before the Fed's interest rate meeting on September 18, much will still depend on the performance of economic data.
Of course, although the market has returned to normal, the consecutive 'black trading days' in early August did highlight the vulnerability of some crowded trades. At that time, the market turbulence caused by the July non-farm payroll data in the United States temporarily triggered panic on Wall Street. $CBOE Volatility S&P 500 Index (.VIX.US)$ Soared to over 65, with US stocks, especially technology stocks, plunging for multiple days.
Some industry insiders have said that if there is any lesson the short-lived market collapse in early August has taught us, it is that the crowded trades that people were unanimously chasing, such as long AI themes and carry trades financed in Japanese yen, may suddenly turn around.
New trend, new direction
Since the beginning of this year, the rise of US stocks has been mainly driven by tech giants, but in recent months, the range of rising stocks has actually expanded. Many investors have turned to areas in the market that were originally neglected, such as smaller companies and more economically sensitive industries.
The small-cap stocks$Russell 2000 Index (.RUT.US)$$CSI 500 Equal Weight Index (000982.SH)$$S&P 500 Index (.SPX.US)$.
Traders seem to be interested in various types of assets, from small-cap stocks to speculative debt. They firmly believe that despite the weak performance of the labor market data last month, the United States will still be able to avoid a recession. EPFR Global data compiled by Bank of America shows that funds focused on US stocks saw a net inflow of $5.8 billion last week, marking the ninth consecutive week of net inflows, while funds focused on high yield bonds attracted $1.7 billion.
However, stocks currently appear to be relatively expensive. According to data from FactSet, the forward price-to-earnings ratio of companies in the S&P 500 index for the next 12 months is about 21 times, higher than the average level of about 18 times over the past 10 years.
Credit spread- The magnitude of the difference between the yield required by investors when holding corporate bonds and the yield required when holding US Treasury bonds, usually reflects investors' level of concern about the economy. The stronger the concern, the larger the spread, to compensate for the higher default risk faced by corporate bonds.
However, at present, investors seem to have no worries: measured by historical standards, corporate bond spreads are still small. In 2022 and 2023, the relevant spreads were larger, and investors were more concerned that the Fed would cause an economic recession while curbing inflation. Recently, although the spread temporarily widened due to the poor July employment data, it has since reversed. This indicates that investors feel they need to see more bad data before they truly press the sell button.
In the US Treasury bond market, the yield spread between 2-year and 10-year US bonds is expected to end the longest-ever period of inverted yield curve, which usually occurs when the economy enters or approaches a recession, or when the Fed is close to cutting interest rates. It is not yet clear how this situation will unfold.
Fed officials have said that even without further signs of weakness in the labor market, they plan to gradually cut interest rates as a precautionary measure. This could lead to a normalization of the yield curve without an economic recession. However, another scenario in the market is that disappointing data could lead to more aggressive rate cuts and faster declines in short-term yields, which would be a sign of a possible repeat of history (the inverted yield curve ending is expected to be followed by a recession).
Currently, there are still some cautious market participants. For Jack McIntyre, portfolio manager of global bond investment at Brandywine Global Investment Management, predicting the world after the pandemic is almost futile. If you absolutely had to make him speculate, it would be that the resilience of the economy will weaken in the next year, and in this environment, bond yields will outperform stocks.
He said, "To me, a soft landing is just a delay in a hard landing. I don't think we'll go from a soft landing back to no landing."
This Friday, the US Department of Labor will release the latest non-farm payroll data for August, which is undoubtedly worth keeping a close eye on for investors. As economic growth becomes the sole focus of the market, the performance of heavyweight macroeconomic data has the potential to significantly impact market sentiment. Federal Reserve Chairman Powell stated last month at the Jackson Hole Global Central Bank Symposium that the "direction of future policies is clear," but "the timing and pace of rate cuts will depend on new data, evolving outlooks, and the balance of risks."
Editor/Rocky