With large technology companies leading the rebound and robust employment reports continuing to support corporate profit prospects, the US stock market continued its several week journey to new highs last week. At present, the sustained strong US economic data seems to have brought an unexpected joy to US stock investors - even though the expectation of the Federal Reserve's interest rate cut continues to cool, US stocks still seem to have endless upward momentum.
Many investors believe that strong growth is beneficial for the stock market, especially if it is accompanied by better than expected corporate profits. After the far exceeding expected non farm payroll data was released last Friday, the S&P 500 index hit a new high, thanks to the soaring stock prices of Meta and Amazon, which rose 20% and 8% respectively after announcing their results.
In fact, there have been three different speculations in the industry over the past two years about the future direction of the US economy: a "hard landing", a "soft landing", and a "no landing". Economists usually discuss the first two most - that is, while the problem of high inflation is being solved, the US economy is experiencing severe damage or even recession (a hard landing), or the economic growth rate continues to face a mild slowdown (a soft landing). But now it seems that, like last year, the US economy still intends to stay on a "non landing" track - that is, the economy will continue to maintain high growth rates.
David Donabedian, strategist at CIBC Private Wealth, stated that last Friday's employment report questioned the claim of a "soft landing", and the January employment report was quite eye-catching, suggesting a possibility of a "no landing". The economy is still moving forward.
Chris Zaccarelli of the Independent Advisor Alliance points out that just as many people are caught off guard by a recession that never occurred in 2023, it is possible that there will not be a recession in another year.
Bank of America strategist Michael Hartnett pointed out in a report that currently 75% of investors expect a "soft landing" in the economy, 20% of investors expect the economy to "not land", and only 5% of investors expect to face a "hard landing".
The Quiet Transformation of Market Logic
So, what does the prospect of "no landing" mean for financial markets?
From the market performance since the beginning of the year, it is not difficult to notice that a typical market characteristic is emerging - "rising stocks and falling bonds" (rising US bond yields).
In fact, as we have previously discussed, Goldman Sachs believed that the answer to the question of why US bond yields have been rising this year while US stocks are still so strong was simple: the US economy is too good. So good that optimistic expectations of corporate profits can to some extent overwhelm the impact of changes in the Federal Reserve's interest rate expectations (weakened expectations of rate cuts). The bond market is clearly not benefiting from the hot performance of the US economy.
And many investment banking institutions also mentioned this over the weekend. According to Neil Dutta of Renaissance Macro Research, strong growth in labor productivity means that unit labor costs are under control - which is a good background for corporate profitability.
Bret Kenwell of eToro also stated that& Quota; Faced with such strong economic resilience, it is difficult for people to be overly bearish; Quota;. Larry Tentarelli of the Blue Chip Daily Trend Report believes that these data are "very bullish signs of the economy" and adds, "We are buyers of any stocks with weak short-term trends.".
Among them, Keith Lerner, Co Chief Investment Officer of Trust Advisory Services, can be said to have spoken out many people's voices. He mentioned, "I would rather cut interest rates less in exchange for a stronger economy than deal with the mess of a weaker economy with more cuts."
However, it should be noted that this new phenomenon of "rising stocks and falling bonds" within the year is fundamentally different from the market logic of the US stock market during the sharp rise in the fourth quarter of last year: at that time, the market was basically "rising stocks and bonds at the same time" (with lower US bond yields). The main driving force behind the market's rise at the end of last year was still more focused on the Federal Reserve's expected interest rate cut for the coming year (2024).
It can be said that at the end of last year, although the market was relatively optimistic under the expectation of a "soft landing", it was not as "reckless" as it is now.
Michael Hartnett of Bank of America believes that the current enthusiasm for technology stocks is somewhat similar to the Internet era, reflecting a hypothesis that despite the tightening of monetary policy, the economy will still perform strongly.
How long will the phenomenon of rising stocks and falling bonds last?
So, how long can the "stock rise and bond fall" phenomenon in the current "no landing" scenario in the US market last?
The main dimensions that need to be observed may remain at two points:
One is still the financial performance of the enterprise. The US stock market's financial reporting season is still in the latter half. After the financial reports of technology giants are mostly released, people will face a large amount of financial reports from other industry giants such as Eli Lilly, Walt Disney, and ConocoPhillips next week. Their performance may also better reflect the current state of the US economy and the situation of companies in various industries.
The second focus is mainly on inflation. The reason why the market is not worried about the weakening expectation of interest rate cuts this year is because it is well aware that interest rate cuts are only a matter of time - the March cut is not a big deal, and it cannot wait until May. While a series of economic indicators in the United States performed well in the first month of the new year, inflation did not actually rise significantly (CPI and PCE as a whole were mixed). However, if the hot performance of the US economy in the future really starts to drive inflation indicators back up and soar significantly, then this may bring real trouble to the market