Recently I have begun to understand the importance of understanding the macroeconomics. It is important to review history. There is nothing new under the sun. Everyone knows this. But knowing it but not studying history is stupid. Why is studying history effective? Because human beings are the most important part of history, and human nature is the eternal truth.
Liquidity is the life of an asset. If we look at the performance of U.S. stocks in previous interest rate hikes, the performance of cryptocurrencies is almost the same.
The chart below shows the trend of Fed interest rates and the S&P 500 index:
It can be seen that there is no positive correlation between the interest rate hike itself and the bearish U.S. stock market. Even bear markets sometimes occur during interest rate cuts, and it is important to realize that raising interest rates is just a means by the Federal Reserve to prevent the economy from overheating and triggering inflation.
For example, in 2020 and 2008, which are very close to us, the Federal Reserve has clearly adopted interest rate cuts to stimulate the economy, but the S&P 500 is still falling without looking back. In 2000, a rare technology stock bubble burst, and in 2008, there was a subprime mortgage crisis.
On the whole, the probability of U.S. stocks falling sharply during the period of interest rate hikes is not high. Downturn in fundamentals is the core negative factor. When the valuation of U.S. stocks is too high and the leverage of the entire market is very high, the market is also facing concerns about economic downturn and corporate profits falling short of expectations.
Before the wave of technology stocks in the U.S. stock market burst, the Nasdaq index rose 13 times in 10 years, from 323 points to 5,000 points, and then ushered in a three-year bear market. The maximum retracement of the Nasdaq index was 78 %.
The same principle applies to the subprime mortgage crisis in 2008, except that it was not particularly evident in the U.S. stock market, but more in the U.S. real estate market.
The picture below shows the U.S. house price index👇
美股历史上的两次大崩盘，和加息关系其实并不大，在我看来都是反身性的积累。例如：房价上涨，原先买房的人受益，尝到甜头，推动周边的人继续去买房，自己去贷款买房，推动房价的进一步上涨，在这个过程中不断的叠加杠杆，赚钱的效应吸引越来越多的人参与，直到美国人家中的狗都有了贷款，涨无可涨，一声轰然，应声而倒。这个过程是不是很熟悉，Gamefi，质押挖矿，稳定币，都是一个摸子，只不过坍塌的速度有快有慢罢了。
Since 1990, the Federal Reserve has raised interest rates four times. The following chart shows the correlation performance of U.S. stocks some time after the Federal Reserve raised interest rates for the first time:
The interest rate hike in 1994 was relatively of little reference significance because it was a "precautionary interest rate hike" carried out by the Federal Reserve Chairman headed by Greenspan at the time. This was a relatively radical measure at the time, but the inflation rate that year was It also achieved an economical soft landing at lower conditions and achieved good results. During the interest rate hike in 1994, U.S. stocks continued to rise.
Interest rate hike in 1999
As inflationary pressure increased, the Federal Reserve raised interest rates six times from June 1999 to May 2000, with a cumulative increase of 175bp; it raised the target interest rate from 4.75% to 6.5%. Prior to this, the U.S. economy expanded by 10%. Year. The Nasdaq index rose from 332 points to 5072 points between 1990 and 1999, a full 13-fold increase.
At the beginning of the interest rate hike, U.S. stocks fell slightly. After almost 12 weeks, U.S. stocks recovered a 12% decline and then continued to rise.
In the middle of the interest rate hike, starting in October 1999, the U.S. stock market began a violent bull market. The Nasdaq index pulled from 2,600 points to 5,000 points in just six months, almost doubling in half a year. During the same period, the S&P 500 rose by more than 20%, mainly due to the dissipation of expectations for interest rate hikes and the rising profitability of U.S. stocks, which created a valuation bubble for this wave of technology stocks.
At the end of the interest rate hike, as the market's concerns about the decline in U.S. stock earnings intensified, the vigorous wave of technology stocks in 2000 collapsed. At the same time, the price of oil, the king of commodities, rose from the lowest of $11.25 in 1999 to $36, an increase of more than 200%. This is during the period of interest rate hikes, rising oil prices, and technology stocks that are unable to rise. In 2000, there was also a grand occasion similar to the ICO in the currency circle. In 2000, it was the craze of US stock IPOs. The Nasdaq PE during the same period was as much as 189 times, which shows its madness.
再大的盛宴也有落幕的时刻，2000年4月 开始，美股进入了长达两年之久的下跌行情，纳斯达克的最大回撤达到了78.4%，直到2003年8月 才算真正走出技术面的熊市；15年之后，也就是2015 年，才再次触碰到2000 年纳斯达克的最高点——5000点。
Note: The turning points in the collapse of the technology wave in 2000 include: Microsoft’s antitrust bill caused market concerns about the profit prospects of Internet companies, and rising international oil prices caused the market to worry about the Federal Reserve’s interest rate hikes; this reminds me of the big crash before May 19. In fact, BTC After Coinbase was successfully listed in the United States, it did not reach new highs. This can also be considered a landmark event; experienced veterans can talk about whether there are any landmark events in the collapse of the ICO craze in 2017.
Interest rate hike in 2004
From 2004 to 2006, the real estate industry prospered and U.S. stocks rose strongly during the interest rate hike cycle.
After the Internet wave burst in 2000, U.S. real estate prospered, but it paved the way for the next crisis.
In response to the economic recession caused by the collapse of technology stocks, the Federal Reserve began to significantly cut interest rates in 2001, and interest rates have remained at an extremely low level for a long time. In June 2002, the George W. Bush administration launched the "Blueprint for the American Dream" plan, aiming to help poor families buy homes, which promoted the booming development of real estate in the United States and also brought about inflation.
The Federal Reserve started a round of interest rate hikes in June 2004. This interest rate hike cycle lasted for two years, with a total of 11 interest rate hikes. The interest rate was raised from 1% to 5.25%. The rate of increase reached 425bp. The increase was the same as in the 1980s. The most since the 1990s.
In the early stages of raising interest rates, compared to the last time it raised interest rates, perhaps the Fed's PUA was better, or perhaps the market was more responsive. Nasdaq began a series of adjustments in early 2004, and the overall magnitude of the adjustments was is 18%. The S&P 500 adjusted only 5% after the interest rate hike. The adjustment brought about by the interest rate hike only lasted for one and a half months.
In the middle and late stages of interest rate hikes, U.S. stocks have been moving unswervingly upward during this complete cycle of interest rate hikes. The S&P 500 has increased by 25% during this round of interest rate hikes, and the Nasdaq has increased by 33%. %.
It was not until a year after the Federal Reserve stopped raising interest rates that the U.S. stock market began a major decline. This was also the historical period corresponding to the movie "The Big Short."
The S&P suffered its largest decline in 70 years from 2007 to 2009 - 57.69%.
Compared with the last round of interest rate hike cycles, the time for U.S. stocks to start large-scale adjustments is lagging behind. On the one hand, the earnings growth rate of listed companies was very strong, and the S&P 500 ROE did not start to weaken until June 2007. On the other hand, the decline in U.S. stocks lagged behind the decline in earnings, indicating that the capital market did not fully understand the crisis in the early stage. The impact of the subprime crisis on the U.S. economy gradually emerged in the first half of 2007. For example, New Century Financial, the second largest subprime mortgage institution in the United States, declared on the verge of bankruptcy in March 2007; S&P lowered its subprime mortgage rating in July, but the stock market didn't actually peak until October of the same year.
The market is not necessarily right, but right or wrong is meaningless. What matters is how much money we can make when we agree with the market; how much money we lose when we go in the opposite direction to the market. This is the most important thing. .
Interest rate hike in 2015
Before the start of this round of interest rate hikes, the United States implemented unprecedented monetary easing policies and three rounds of quantitative easing in response to the strong impact of the financial crisis. By the first half of 2015, the United States had basically recovered from the impact of the financial crisis.
From December 2015 to December 2018, the Federal Reserve raised interest rates a total of 9 times, from 0% to 2.25%, with a cumulative rate of 225bp.
At the beginning of the interest rate hike, the Nasdaq had an adjustment of 18%, which was similar to the last adjustment. It started to adjust by almost 18% four months before the interest rate hike began, and then it also adjusted at the beginning of the interest rate hike. After the interest rate hike began, the U.S. stock market experienced two months of adjustment and then came out of the downturn again.
In the middle of the rate hike, the pace of interest rate hikes slowed down, which was beneficial to Trump's tax cut plan, and U.S. stocks continued to rise. After completing the adjustment, Nasdaq rose almost 100% from the bottom (from 4200 points to 8100 points). The rise in U.S. stocks in 2016 was mainly due to the slowdown in interest rate hikes. The Federal Reserve implemented only one round of interest rate hikes in 2016, far fewer than the four announced at the end of 2015. From 2017 to September 2018, the profits of listed companies increased due to the tax cut plan proposed by Trump, which led to an increase in the profits of US stock companies.
At the end of the rate hike, although the rate hike was about to end, with the slowdown in economic growth and the advancement of balance sheet reduction, the S&P showed a 15% adjustment; the Nasdaq showed a 23% adjustment.
summary
In fact, there is not such a strong positive correlation between interest rate hikes and the trend of U.S. stocks, but they generally have an impact in the early stages of interest rate hikes. More impact still comes from fundamentals. Whether inflation shows signs of being controlled and whether the earnings of U.S. stock companies can rise. These are actually the more core issues.
After studying history, I found that there is really no need to rush or rush when it comes to investing. In the era we live in now, there will never be a shortage of black swans, and there will always be unknown things. Compared with before, the capital market is reacting faster and faster, and the derivatives market is getting bigger and bigger. It is precisely because of this that sometimes it is easy to dry up liquidity, similar to the three times in the past 20 years in the U.S. stock market. Meltdown, that is, 312.
A patient hunter will definitely be able to wait for the opportunity, especially in a market like the currency circle with inherently less friction and resistance, which is more prone to so-called surges and plummets. People don't need so many opportunities in their life, just wait patiently for a good opportunity to appear. Looking at the U.S. stock market, the technology bubble, the subprime mortgage crisis, and the three circuit breakers all seem so understated after the fact, but it is impossible to imagine what happened to the people who were involved.
Chasing a bubble and getting out before it bursts is easier said than done. If our own investment system suddenly encounters a black swan or plummets, and it will last for 2-5 years, we can still go long on the target of our choice with peace of mind. Every crisis is an excellent opportunity in hindsight. In the capital market, living well is more important than anything else.
That's it, Dyor.
