The US stock market experienced significant fluctuations in the past week

The US stock market experienced its largest fluctuation since 2019 over the past week. Although the weekly close was basically flat, the market oscillated like a roller coaster. On Monday, there was a panic sell-off, followed by a rebound on Tuesday, another drop on Wednesday, and the rebound trend continued on Thursday and Friday. Overall, the stock market is closely linked with the crypto market.

Although market discussions focus on the U.S. economic recession and the unwinding of yen carry trades, these may be two "pseudo-issues." In fact, the real panic is relatively short-lived, and there has not been a situation of selling everything (, including bonds and gold ), when a crisis breaks out.

The US stock market has retraced about 8% from its historical high, but the current level is still 12% higher than at the beginning of the year. Considering the rise in bonds, investors with a higher degree of diversification have not been significantly affected. Historically, there are an average of 3 adjustments of more than 5% and 1 adjustment of 10% each year. If the stock market declines without an accompanying economic or corporate earnings recession, it is usually temporary, followed by a good upward trend.

The overall performance of the corporate financial reports is good

91% of companies in the S&P 500 have released their Q2 earnings reports, with 55% of companies exceeding expectations. Although this is below the average level of the past four quarters, it still remains above 50%. There are significant differences in performance across industries, with healthcare, industrials, and information technology sectors performing well, while energy and real estate are relatively weaker.

The financial reports of major tech companies this quarter are generally solid, with no significant decline in performance. The valuation pressure mainly stems from increased AI investments. NVIDIA's 24-month forward PE has dropped to 25 times, nearing a 5-year low, and its PE premium over the S&P 500 has decreased from 1.8 times to 1.4 times, indicating that valuations are becoming reasonable.

Interest Rate Cut Expectations and Policy Direction

According to the Taylor rule, the current target for the federal funds rate should be around 4%, which is 150 basis points lower than the actual level. The market has priced in expectations of a 100 basis point rate cut within the year, with ( four times ). A rate cut of more than 25 basis points in September or expectations of more than three cuts within the year would require sustained deterioration in data, especially in the labor market data.

In the short term, the U.S. interest rate market may primarily experience fluctuations with rises followed by corrections. For periods longer than one month, it is in a buying on dips mode, as the interest rate cut cycle will eventually begin. The market still needs time to reach a consensus on whether the rise in unemployment rate signifies an economic slowdown and potential recession, during which emotions may fluctuate.

Cryptocurrency Market Review

Cryptocurrencies have experienced the most drastic correction since the FTX crisis, with Bitcoin's price dropping over 15% before rebounding. This correction was mainly triggered by adjustments in traditional markets, rather than internal events in the cryptocurrency market. The technical indicators are severely oversold, approaching the levels seen on August 16 of last year.

Retail investors played an important role in this adjustment. The outflow of funds from Bitcoin spot ETFs significantly increased in August, reaching the highest monthly outflow since inception. In contrast, the risk-off behavior of participants in the U.S. futures market has been limited, as the changes in CME Bitcoin futures contract positions and the positive spread of the futures curve indicate that futures investors still maintain a certain level of optimism.

Factors keeping institutional investors optimistic include: Morgan Stanley allowing wealth advisors to recommend Bitcoin spot ETFs; the liquidation pressure from the Mt. Gox and Genesis bankruptcy cases may have passed; cash payouts after the FTX bankruptcy could further stimulate demand by the end of the year; both sides of the U.S. election may support favorable regulations for cryptocurrency.

Capital Flow and Investor Sentiment

Despite a significant reduction in stock allocation recently, the current allocation ratio of (46.5%) is still higher than the average level after 2015. To return to the average level after 2015, stock prices need to fall further by 8%. The cash allocation ratio for investors is extremely low, which may increase vulnerability when the market faces pressure.

Bond allocation has significantly increased recently, as investors turn to bonds as a safe-haven asset during the stock market correction. Retail investor reactions have been relatively mild, with no large-scale withdrawals occurring. Retail sentiment surveys remain moderately positive. Changes in Nikkei futures positions indicate that speculative investors have significantly reduced their long positions, and the speculative net short position in the yen has nearly returned to zero.

China-themed funds inflowed $3.1 billion, with passive funds continuing to buy since the end of May. This week, stock fund inflows have remained positive for the 16th consecutive week, even increasing compared to the previous week. However, bond fund inflows have slowed.

The allocation of subjective investors and systematic strategies has decreased from a higher level to slightly below the average level, marking the first drop to such a low level since the major correction last summer. The VIX index recorded a historic high in single-day fluctuation, but considering that the overall market fluctuation was less than 3%, it indicates that there are liquidity issues in the VIX market.

Upcoming Key Events

Key events in the coming weeks include:

• Consumer Price Index ( CPI ) published
• Retail sales data released
• Jack