Core viewpoint:
The current market's extreme volatility in expectations for the Federal Reserve's interest rate cut is fundamentally a classic tactic by institutions to create panic and accumulate positions at low prices using short-term negative data. Although CPI and PPI data have disturbed market sentiment, the substantial deterioration in the job market (with only 73,000 non-farm jobs added in July and a cumulative downward revision of 253,000) has forced the Federal Reserve into a policy shift cycle. Top institutions like Morgan Stanley continue to increase their holdings in US and Japanese stocks, with core ETFs like SPY and QQQ seeing weekly inflows exceeding $5.4 billion. These signals reveal the certainty of the big trend—interest rate cuts are inevitable, and declines present opportunities.
I. Economic data is irrefutable: Interest rate cuts are on the horizon
1. The job market is on the brink of losing control
In July, non-farm payrolls added only 73,000 jobs, far below the expected 104,000, with the previous value being significantly revised down by 253,000, and the unemployment rate rose to 4.2%. This is the highest level since November 2021, and the labor force participation rate has declined for four consecutive months, masking the real unemployment pressure. Historical data shows that when the unemployment rate exceeds 4% and continues to rise, the Federal Reserve has never been absent from the interest rate cut cycle (as in 2001, 2008, 2020).
2. Inflation stickiness is overvalued by the market
Despite the core CPI of 3.1% year-on-year and PPI service prices rising by 1.1% in July, these are mainly due to short-term supply shocks caused by tariff policies. Morgan Stanley estimates that the impact of tariffs on prices will gradually fade within 6-9 months, while the weakness in the labor market is the core variable determining monetary policy. Currently, the growth rate of hourly wages has slowed to 0.3%, and the service sector inflation lacks sustained momentum.
3. Corporate profit pressure forces policy easing
Retail sales in July increased by only 0.5% month-on-month, and the data excluding automobiles fell short of expectations, with corporate equipment investment declining for three consecutive months. The second-quarter net profit growth rate of S&P 500 constituents dropped to -2.1%, and tech giants like Apple and Tesla fell into a technical bear market. Historical experience shows that the probability of the Federal Reserve cutting interest rates during a corporate profit recession period is as high as 85%.
II. Decoding institutional movements: The manipulation by big players reveals the essence of accumulating positions
1. Capital counter-cyclically positioning in growth assets
Despite the spread of panic in the market, growth ETFs like SPY, QQQ, and ARKK saw a weekly net inflow of $5.46 billion, hitting a three-month high. Top institutions like Berkshire and BlackRock have recently increased their holdings in core assets such as UnitedHealth and Intel, with Buffett's fund surprisingly buying 10% of a healthcare giant after hours. This 'buying more as prices fall' operation is highly similar to the capital flows before the interest rate cut in June 2019.
2. Derivatives market releasing reversal signals
Data from the Chicago Board Options Exchange (CBOE) shows that the ratio of put options to call options (PCR) for the S&P 500 index has risen to 1.2, the highest since October 2022. Historically, when the PCR exceeds 1.1 and is accompanied by ETF capital inflows, the average market increase over the next three months reaches 8.7%. This indicates that institutions are utilizing panic sentiment to build long positions at low prices.
3. The policy game has entered a fever pitch
The Trump administration continued to pressure the Federal Reserve, even threatening to sue Powell, while Treasury Secretary Mnuchin publicly called for 'a series of interest rate cuts.' Although Federal Reserve officials have recently released cautious signals, this is a typical expectation management tactic—before the interest rate cut in July 2019, Powell also emphasized 'data dependency' multiple times, ultimately leading to the start of a preventive interest rate cut cycle.
III. Historical patterns verification: Declines are the touchstone of bull markets
1. Market performance during the interest rate cut cycle
Looking back at the five rounds of interest rate cut cycles since the 1990s, the S&P 500 index averaged a 15.3% increase in the 12 months following the first cut, while the Nasdaq index rose by 21.8%. The current market valuation (S&P 500 price-to-earnings ratio of 24 times) is lower than the 26 times before the interest rate cuts in 2019, providing a significantly higher margin of safety.
2. Technical patterns indicate an imminent reversal
The S&P 500 index corrected after reaching 6,473 points on August 16 but still stands above the 200-day moving average, with the MACD indicator forming a golden cross around 6,300 points. Historical data shows that when the S&P 500 corrects to the 200-day moving average during a stage of rising interest rate cut expectations, the probability of an increase in the following three months exceeds 75%.
3. Geopolitical risks are overvalued
Despite market concerns over tariff policies, Yale University's model shows that its long-term impact on GDP is only -0.4%, far below the -1.2% during the 2018 trade war. The current market's panic over tariffs has already been reflected in stock prices, while institutions are more concerned about the liquidity benefits brought by interest rate cuts.
IV. Operational strategy: Seize layout opportunities in the golden pit
1. Core allocation direction
- Technology growth stocks: Leaders like Nvidia and Amazon have retraced to near the 60-day moving average, with institutional holding ratios still at historically high levels.
- Financial sector: Morgan Stanley predicts that bank stocks will outperform the market by an average of 12% during the interest rate cut cycle.
- Anti-inflation assets: Gold ETF (GLD) has recently seen the highest capital inflow of the year, consistent with its performance before the interest rate cut in September 2024.
2. Key points for risk control
- Position management: It is recommended to increase the proportion of equity assets to 70%, while retaining 30% in cash to cope with volatility.
- Stop loss settings: The 6,300 points level for the S&P 500 index is a key defensive position; if it falls below this, short-term reduction of positions is necessary for risk avoidance.
- Policy observation window: Focus on Powell's speech at the Jackson Hole meeting on August 22. If dovish signals are released, increase positions to 80%.
V. Ultimate conclusion: The inevitability of the big trend and tactical flexibility
Inevitability:
The Federal Reserve is caught in a dilemma between 'protecting employment' and 'controlling inflation,' but historical experience shows that its policy balance must lean towards employment. The current market's adjustment of interest rate cut expectations is fundamentally a 'golden pit' created by institutions using short-term data disturbances. Morgan Stanley estimates that the central federal funds rate will drop from 5.25% to 4.0% by 2025, a reduction of 125 basis points.
Flexibility:
In the short term, caution is needed for fluctuations sparked by hawkish signals from the Jackson Hole meeting, but medium- to long-term positioning should focus on three main lines:
1. Sectors benefiting from interest rate cuts (technology, finance, real estate);
2. Policy stimulus expectations (infrastructure, new energy, semiconductors);
3. Defensive assets (gold, essential consumer goods).
Remember Jin Dachuan's advice: Every panic is an opportunity for cognitive realization. When retail investors discuss 'the bear market is coming,' they are unaware that the bull market is just gaining momentum. History does not simply repeat, but human greed and fear have never changed. The current hesitation will eventually become future regret.$BTC
