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Less worries about stock trading

At a critical moment, the Federal Reserve released an important signal.

In the early morning of July 18th, Beijing time, the Federal Reserve released the latest issue of the "Beige Book" - a regional economic status survey report compiled by 12 local federal reserves. The report stated that due to various uncertainties, people's expectations for the future growth of the US economy have slowed down; inflationary pressure and consumption downgrade are also common situations.

Currently, the U.S. stock market is experiencing a super storm. At the close of U.S. stocks overnight, Nasdaq plummeted 2.77%, the largest single-day drop since December 2022; the S&P 500 fell 1.39%, and the Dow Jones rose 0.59% against the trend, continuing to hit a record high. Among the top ten stocks in the U.S. stock market, 9 stocks all fell, Nvidia, TSMC, and Meta plummeted by more than 5%, and the total market value evaporated by more than US$600 billion (about RMB 4.3 trillion) in a single day.

Regarding the plunge in U.S. technology stocks, Scott Rubner, managing director and tactical strategist at Goldman Sachs' global markets department, said bluntly: "I would not buy at this point. The S&P 500 has nowhere to go but down." He also warned that July 17 usually marks a turning point in U.S. stock returns, and the following August is usually the worst month for passive investments and mutual fund outflows.

Federal Reserve News

In the early morning of July 18th, Beijing time, the Federal Reserve, as usual, released the "Beige Book" which records the economic conditions of the 12 regional Federal Reserve systems two weeks before the July interest rate meeting. It summarized the latest information collected as of July 8 and the previous six weeks, and released the latest policy signals to the market.

At the level of "overall economic activity", the Beige Book stated that economic activity in most Federal Reserve districts in the United States maintained slight to small growth in late May and June this year, with economic activity increasing in seven districts and remaining flat or declining in five districts. In the last report in May, it was stated that economic activity in only two districts remained unchanged.

The labor market maintained "slight growth" in both the May and July Beige Books. Most districts reported flat or "slightly higher" employment, with more districts noting flat or lower employment, and only a few districts reporting "modest" employment growth. Several districts reported a decline in manufacturing employment as new orders slowed.

In terms of wage trends, wages in most districts grew at a "moderate to moderate" pace, with several districts saying that increased worker availability and reduced competition for labor slowed wage growth. The above description is cooler than the Beige Book in May, when wage growth was described as "mostly maintaining moderate growth, with a few districts growing more moderately."

In the banking and financial sector, consumer and business loan demand softened in most districts, but loan demand remained moderate overall and deposits continued to decline slightly.

It is worth noting that the Beige Book also talks about the expansion of investment in AI technology. Utility contacts reported that electricity demand in the commercial and industrial sectors is increasing, which is mainly attributed to new and expanded data center projects that focus on the increasing use of artificial intelligence technology.

The Beige Book warned that expectations for the economy over the next six months are for slower growth due to uncertainty over the upcoming U.S. presidential election, domestic policy, geopolitical conflicts and inflation.

Some analysts said that the latest Beige Book showed that overall U.S. economic activity remained positive, but showed signs of slowing down. Consumer spending was stable but not growing, and consumers were more sensitive to prices. The economy was still growing, but at a slow pace, and there were increasing signs that growth was stagnant or declining, "which could herald a soft landing, but remember that every hard landing started with a soft landing."

At the same time, a number of Federal Reserve officials continued to send "dovish" signals. Among them, Federal Reserve Board Governor Waller said that the time for a rate cut is getting closer; New York Fed President Williams, who has a permanent vote on the FOMC and is known as the "third in command of the Federal Reserve," said that the Fed is close to a rate cut, but is not yet ready to do so; Richmond Fed President Barkin mentioned that inflation data in recent months has been encouraging, but "more" evidence is needed to prove that inflation continues to slow.

Big Storm

On the day when the Federal Reserve released the Beige Book, the U.S. stock market encountered a super storm. As of the close, the Nasdaq index plummeted 2.77% to 17,996.92 points, the largest single-day drop since December 2022; the S&P 500 index fell 1.39% to 5,588.27 points; the Dow Jones Industrial Average rose 0.59% to 41,198.08 points, continuing to set a record high.

Among the top ten stocks in U.S. stock market capitalization, except for Berkshire which caught the concept of "value rotation", the other nine stocks all fell. Nvidia, TSMC, and Meta plummeted by more than 5%, and the total market value evaporated by more than US$600 billion (about RMB 4.3 trillion) in a single day.

In addition, the semiconductor sector of the US stock market plummeted across the board, with the Philadelphia Semiconductor Index falling 6.81%, the largest single-day drop since March 2020, and the total market value evaporating by nearly US$500 billion. Among them, ASML's US stock plummeted 12.74% and was once circuit-breakered, AMD fell 10.21%, and Qualcomm fell more than 8%.

Currently, a large amount of funds that have been grouped together with technology giants are fleeing in a hurry, and continue to flow into traditional blue-chip value sectors, pushing the Dow Jones Industrial Average higher against the trend and setting new highs.

Regarding the plunge in U.S. tech stocks, Scott Rubner, managing director and tactical strategist at Goldman Sachs' global markets department, said bluntly: "I would not buy at this point. The S&P 500 index has nowhere to go but down."

In a recent memo to clients, Rubner said July 17 typically marks a turning point in U.S. stock returns, based on data going back to 1928. August, which follows, is typically the worst month for outflows from passive investing and mutual funds.

Rubner said that after a series of record high performances, the U.S. stock market is exposed to the risk of weak capital inflows and is vulnerable to negative news. He further explained that no inflows from passive investors or mutual funds are expected in August. For trend-following system funds, positions have reached their maximum size, which means there is no room for further purchases.

Rubner also further refuted potential objections, emphasizing that factors such as "strong earnings of listed companies", "the Fed began to cut interest rates" and "Trump's victory" will not be positive catalysts for the market. These events have been priced in by the market, and the large technology stocks that have pushed the US stock market to new highs are also facing very high earnings expectations - the "high" here means that the financial reports must be very good.

Goldman Sachs' trading team has insisted since early June that the (U.S. stock) index is on the verge of a summer correction due to seasonal weakness, market positioning and all the good news has been digested by the market.

Source: China Securities

Statement: All information content of Databao does not constitute investment advice. The stock market is risky and investment should be cautious.

Editor: He Yu

Proofreading: Yang Lilin

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