In the past two weeks, the global financial market has been full of drama, the three major US stock indexes continue to soar, among which the S&P 500 index, known as the vane of the US economy, has broken the historical record for 10 consecutive times in the sixth week of the year alone, and broke the 5,000-point mark for the first time in history.
Historically, the U.S. stock market in election years has usually been dominated by the rally, and there are two main reasons for the upward movement of the market:
- Bipartisan election promises for votes, such as boosts and subsidies for the healthcare and new energy sectors, will be priced in in advance, which in turn will drive the appreciation of related stocks and sectors;
- The competition for capital behind the partisan struggle – In the 2016 and 2020 elections, for example, the traditional energy giants (fossil fuels) that supported Trump experienced huge stock price fluctuations at the time of Trump's victory and defeat, and rose rapidly after his victory.
At first glance, this year's election year is indeed in line with historical stock market surges, but in reality, a huge crisis is already brewing.
To pinpoint this potentially huge crisis,
We need to look beyond the semblance of a stock market boom.
The first question we have to ask is what is the reason for this crazy rise in US stocks, if it is because of the overall rise caused by the sound economy, then the S&P 500 index as an economic bellwether to break through new highs (composed of 500 listed companies from 11 industries) is understandable.
It makes sense that most of the world's stock markets have followed suit.
But it's clear that the first few surges in U.S. stocks have not been like this, but have been driven almost by the technology sector, which has risen 12.48% over the past month, far outpacing the rest of the sectors, while sectors such as raw materials (-0.71%), real estate (-2.71%) and utilities (-6.79%) have seen negative returns.
The tech sector not only hedged against these dismal performers, but also pushed stock indices to new highs, which shows the ferocity of the gains.
Another key point is that technology stocks account for a staggering 30% of the S&P 500 index, and seven of the 10 most valuable companies in the index are technology companies: Microsoft, Apple, Nvidia, Google, Qualcomm, etc. (see chart below).
As a result, the S&P 500 has become almost a technology index, and is no longer the equilibrium index that was once hailed as an "economic bellwether".
If we look at the real tech index, the Nasdaq 100, we see a very similar problem, with the top 10 companies by market capitalization almost identical. The Nasdaq index has also hit new highs recently.
At this point, the answer to our first question is already coming out – it's nothing else that has been driving the U.S. stock market rally recently, but technology stocks. What drove the surge in technology stocks was the market's high expectation that the Federal Reserve would cut interest rates.
From a financial point of view, this upfront optimism is very reasonable, because technology stocks are highly sensitive to the cost of capital, and a high interest rate environment means high costs, low interest rates represent low costs, and low costs mean that companies will have more profits for R&D and income generation, and investors are more willing to invest money, which in turn will drive stock prices higher.
So here comes our second question:
When exactly will the Fed cut interest rates?
To answer this question, we need to go back to the Fed's interest rate decision in December 2023, when the Fed released its economic outlook package for 2024, which revealed its forecast for at least three rate cuts (0.75%) in 2024.
It was also after this optimistic forecast that the US stock market went into carnival mode.
At the time, the Chicago Mercantile Exchange's (CME) interest rate projections showed a 74.5% probability of a rate cut at the March 20 rate decision.
So today, how much has that probability become?
The answer is 8.5%.
Why such a dramatic reversal?
The answer is that this week's US inflation data for January showed that the consumer price index rose in January instead of falling, with the monthly core inflation MoM rising to 0.4% from 0.3% in the previous month, and the monthly headline inflation rising from 0.2% to 0.3%.
Although they have only rebounded slightly, if we look at the timeline, we will find that inflation in the United States has almost stopped cooling since the Fed paused its interest rate hikes in the second half of 2023.
If the Fed's 2% target cannot be met, then the rate cut will not happen.
Fed Chairman Jerome Powell made this very clear. In the latest episode of "60 Minutes Interview", Powell calmly explained the preconditions and conditions for the rate cut, and did not say anything ambiguous.
Therefore, the release of inflation data immediately hit the running US stock market, and the Dow Jones index plummeted by 525 points on the same day.
So, at most, this is a sign that there may be a correction in US stocks in the foreseeable future, so where is there any crisis?
If we assume that the high interest rate is a wooden barrel filled with water, the pressure of the water in the barrel is constantly putting pressure on the walls of the barrel, and if one board breaks, then the whole barrel of water will burst out.
Now, the cracked plank is commercial real estate in the United States.
During the earnings season two weeks ago, New York Community Bancorp (NYSE: NYCB) nearly halved its shares after reporting earnings due to a sharp depreciation in the value of a large number of commercial real estate in the bank's assets.
In the bank's financial report, it can be seen that the bank deliberately set aside $552 million as a provision, which means that these business assets are likely to have problems. The $552 million figure is more than 10 times the estimates of mainstream analysts.
This shocking earnings report not only caused the stock price of New York Community Bank to halve, but also pushed a large number of regional banks in the United States to the forefront - the regional bank index (KBW) also headed straight south.
What's more, this financial report unravels the wound of commercial real estate in the United States - a large number of office real estate has been vacant on a large scale since the epidemic, taking Manhattan, New York, the "center of the world" as an example, the vacancy rate of those skyscrapers that used to be expensive has exceeded nearly 20%.
Other major cities, such as Chicago, Houston and Dallas in the interior, and San Francisco and Los Angeles on the West Coast, are even more miserable.
As a result of the pandemic's work-from-home wave, these once expensive (rent) towers have been depreciating in value, and the large financial institutions that hold these assets have opted for stop-loss stripping, but few have taken over.
Why is the U.S. real estate market, the locomotive of the global economy, unmanned? The reason is that the cost of financing is extremely high, that is, the interest rate.
More and more defaults are beginning to appear, and these collateralized loan bonds (MBS) as financial derivatives have long been flowing into the financial system in the United States and around the world, and once the tight rope breaks, it will trigger a full-blown thunderstorm.
So, in the gloomy stock market and economic data, the real crisis facing the United States is not fully unfolded in front of the public.
At this moment, the Fed is almost walking on a high-altitude tightrope, and on its head is the crazy bull market of the election year and the inflation that is rebounding.
If you are not careful, you will slip and fall into a full-blown commercial real estate storm.
It will be on the same scale as the subprime mortgage crisis of 2008, which was also caused by real estate.