Category: US STOCKS

The wave of interest rate cuts and improved profit prospects make it timely to allocate to small cap stocks!

The expectation of interest rate cuts is heating up, and investors may be at a critical moment to pay attention to the Russell 2000 index and capture the potential of small cap stocks.

Jefferies’ analysis shows that small cap stocks had strong profits in the second quarter, largely exceeding expectations, and the market’s expectations for them have significantly decreased, reflecting good resilience under economic pressure.

In addition, although the overall market’s profit correction is usually low, the correction rate of small cap stocks still shows a slight positive change, indicating that the market’s expectations for these companies have not significantly deteriorated.

Jefferies predicts that although small cap stocks may experience a slight decline in profits in 2024, they are expected to achieve a growth of 16.7% in 2025, surpassing the 14.2% of large cap stocks! This shows that against the backdrop of interest rate cuts and economic recovery, the growth potential of small cap stocks may become more prominent!

The S&P Small Cap 600 index outperformed the S&P 500 in the second half of the year, indicating a shift in market focus from small cap stocks. Large cap stocks with high valuations may prompt investors to turn to small cap stocks with reasonable valuations and great growth potential.

The market is becoming increasingly diversified, and small cap stocks are becoming more and more eye-catching, especially when the valuation of large cap stocks is high. Investors will look for stocks that still have room for growth.

Small cap stocks’ profits hit bottom, outlook for strong recovery

Small cap stocks’ profits will remain strong in the second quarter, making them more competitive with large cap stocks

As shown in the figure, the estimated annual profit growth rates for small, mid, and large cap stocks in the second quarter (2Q24P), third quarter (3Q24P), and fourth quarter (4Q24P) of 2024.

Small cap Q2 profits decreased by 8.9%, showing negative growth. But the performance this quarter was more robust than expected; Q3 and Q4 profits are expected to decrease by 7.3% and increase by 13.6% respectively. Although Q3 is expected to perform weakly in the short term, Q4 is expected to show a significant rebound, demonstrating the market’s optimistic outlook for the future.

The Q2 profit of medium-sized stocks increased by 2.1%, showing a relatively stable performance and showing a small positive growth; Q3 and Q4 growth is expected to be relatively moderate, at 1.0% and 9.1% respectively. Although the growth of larger cap stocks is relatively slow, they are still steadily rising, reflecting the potential for sustained growth of mid cap stocks in the future.

Large cap stocks increased by 13.3% in Q2, which is consistent with the dominant position of large cap stocks in the current market; The expected growth in Q3 and Q4 is 4.8% and 15.3% respectively, indicating strong sustained growth momentum, especially with Q4 growth significantly higher than other market cap types of stocks.

Small cap stocks have performed poorly in the first half of 2024, especially falling in Q2 and Q3, but are expected to surge to 13.6% by the end of the year. This indicates that everyone is optimistic about the resilience of small businesses when the economy improves, and Q4 may be a good time for those who want to invest in small cap stocks.

Mid sized stocks will perform steadily in 2024, making them the preferred choice for investors pursuing stability and happiness.

Large cap stocks performed well in Q2, maintaining relatively high growth expectations throughout the year, which may be attributed to the financial strength and market leadership of large enterprises, allowing them to better cope with market fluctuations.

Steven DeSanctis, a strategist at Jefferies, stated in Thursday’s report, “We believe that the profits of small cap stocks will remain stable and compete more strongly with large cap stocks. We only have a few small cap companies’ financial reports to release, and overall Q2 performance is robust

DeSanctis pointed out that the profit correction ratio of small cap stocks in the past three months has remained at 0.89, the sales correction ratio is 0.90, and the rolling average over the past three months is slightly lower than 1.0. The profit correction ratio of large cap stocks increased to 1.28, mainly driven by technology stocks, and the sales correction ratio rose to 0.86.

However, for the full year of 2024, profits of small cap stocks are expected to decline by 1.6%, while profits of large cap stocks are expected to grow by over 9%. Jefferies also expects small cap stocks to grow faster than large cap stocks next year, with a growth rate of 16.7% for small cap stocks and 14.2% for large cap stocks.

Earlier this week, Charles Schwab emphasized that since the second half of 2024, the key indicator of US small cap companies – the S&P Small Cap 600 index (SP600) – has performed better than Wall Street’s benchmark S&P 500 index (SP500), indicating a shift in market breadth from large cap stocks to other areas.

Small cap stocks are performing steadily with high expectations for future growth, and the market breadth is gradually expanding from super large investors to small cap stocks. In the second half of 2024, small cap stocks will perform better than large cap stocks. For investors who are interested in small cap stocks, using related ETFs (such as IJR, IWM, etc.) can track the market performance of small cap stocks and seize potential opportunities.

Is the best time to allocate to small cap stocks for interest rate cuts?

Interest rate cuts typically lower borrowing costs, which is crucial for the growth of small businesses as they often require external funding to expand their business. As market liquidity increases, the attractiveness of small cap stocks increases, and investors are more willing to invest in these small cap stocks with growth potential.

Small cap stocks had poor profits in the first half of the year, but it is expected that Q4 will rebound significantly to 13.6%, reflecting the market’s optimistic expectations for their future profit improvement.

In the past few years, due to the high valuation of large cap stocks, small cap stocks have been favored for their low valuation and high growth potential during interest rate cuts, and investors may turn to small cap stocks.

The market is shifting from super cap technology stocks to small cap stocks, with the S&P Small Cap 600 index outperforming the S&P 500, indicating increased interest in small cap stocks, which may continue to attract funds and drive stock prices up.

Loose monetary policy benefits small businesses and growth stocks. When concerns about economic recession subside, investors tend to prefer high-risk assets, and small cap stocks will benefit more.

Which ETFs will benefit deeply?

Based on the future growth potential of small cap stocks, using ETFs (such as IJR, IWM, VB, etc.) can help investors diversify investment risks and gain broader exposure to the small cap stock market.

These ETFs track small cap stocks with broad market representativeness, suitable for investors who wish to participate in small cap stock growth through index investing.

Here are a few recommended small cap ETFs that may benefit from interest rate cuts, especially those tracking the Russell 2000 Index:

IShares Russell 2000 ETF (IWM): IWM is the most representative Russell 2000 Index ETF, tracking 2000 small cap US companies. The Russell 2000 Index covers stocks with a wide range of performance in small cap stocks, making it suitable for investors who wish to invest in small cap stocks through a widely representative index. Cutting interest rates will improve the financing environment for small cap companies, driving their profitability and stock price performance. IWM, as a highly liquid and widely distributed ETF, is an ideal choice for capturing small cap stock market trends.

Vanguard Small Cap ETF (VB): VB tracks the CRSP US Small Cap Index, which includes some of the smallest cap companies in the United States. Compared to IWM, VB’s constituent stocks are more diversified and cover a wider range. VB not only tracks small cap stocks, but also covers some targets of mid cap stocks, providing broader market exposure and better diversification when the market turns.

Schwab U.S. Small Cap ETF (SCHA): SCHA tracks the Dow Jones U.S. Small Cap Composite Index, which covers 2500 small American companies and has a low-cost advantage. Due to its low expense ratio and wide coverage, SCHA has become a good choice for long-term investors looking to invest in small cap stocks.

Vanguard Small Cap Value ETF (VBR): VBR focuses on value stocks in small cap stocks and tracks the CRS US Small Cap Value Index. Value stocks typically perform well during the economic recovery phase. Against the backdrop of interest rate cuts, value stocks benefit from a reduction in capital costs and an increase in profitability. Therefore, VBR can provide additional advantages in economic recovery.

IShares S&P Small Cap 600 ETF (IJR): IJR tracks the S&P Small Cap 600 index, which selects small companies with strong profitability and therefore has slightly lower risk than other small cap stock indices. Due to the focus on profitability requirements of the S&P Small Cap 600 index, the quality of IJR’s constituent stocks is relatively high, and the positive impact of interest rate cuts and market recovery is more significant.

SPDR S&P 600 Small Cap Value ETF (SLYV): SLYV tracks the S&P Small Cap 600 Value Index, focusing on small cap value stocks with a focus on value features such as low P/E ratios and low price to book ratios. Similarly, value stocks have upward potential in the context of interest rate cuts and economic recovery, and SLYV is a good choice to capture the trend of small cap value stocks.

If you want to allocate a wide range of small cap stocks, IWM and VB are good choices, especially IWM directly tracks the Russell 2000 Index; If you tend to invest in value stocks among small cap stocks, VBR and SLYV can provide more targeted exposure; SCHA and IJR are low-cost and highly diversified options, suitable for long-term holding.

Here are some small cap ETFs covering different industries that typically perform well in the context of interest rate cuts:

IShares U.S. Aerospace&Defense ETF (ITA): In the aerospace and defense industry, ITA invests in small cap and mid cap stocks in the U.S. aerospace and defense sector. Interest rate cuts and increased government spending typically drive growth in the industry, especially for defense related companies. Government investment in defense and infrastructure, especially during economic recovery, may drive the growth of companies in this industry. In addition, the recovery of the aerospace industry will also drive the development of related enterprises.

SPDR S&P Biotech ETF (XBI): Biotechnology industry, XBI tracks the S&P Biotechnology Select Industry index, covering a large number of small cap biotech companies, focusing on innovation and research and development. The biotechnology industry is highly sensitive to policy changes and financing environments, and interest rate cuts may promote financing and research and development activities in this industry. With the decrease in financing costs and the development of innovative product pipelines, small biotechnology companies will directly benefit from interest rate cuts, especially those in the clinical research and development stage may be more dynamic.

Invesco S&P SmallCap Health Care ETF (PSCH): In the healthcare industry, PSCH focuses on small cap healthcare companies in the United States, covering the fields of medical equipment, supply, services, and biotechnology. Interest rate cuts typically promote growth in the industry, as these companies often rely on financing for research and market expansion. With the aging population and increasing demand for healthcare, small cap stocks in the healthcare sector have long-term growth potential. Cutting interest rates will further reduce the financing costs of these enterprises and enhance their profitability.

IShares U.S. Home Construction ETF (ITB): The housing construction industry, which tracks the U.S. housing construction industry and includes some small cap housing construction companies. Interest rate cuts directly reduce the loan costs for homebuyers and usually have a positive impact on the real estate market. The interest rate cut will drive an increase in demand in the housing market, especially the decrease in mortgage interest rates, which will further stimulate the growth of small cap companies in the real estate industry.

First Trust Small Cap Energy ETF (FTXS): In the energy industry, FTXS covers small cap energy companies in the United States, particularly oil and gas production, equipment, and service companies. The energy industry is usually greatly affected by fluctuations in raw material prices and economic activity, but interest rate cuts and economic recovery will promote energy demand growth. With the economic recovery driving up energy demand, the performance of small energy companies may significantly improve, especially against the backdrop of reduced financing costs.

Invesco S&P SmallCap Industries ETF (PSCI): Industrial, PSCI tracks the S&P SmallCap 600 Industries index, covering small cap companies in the industrial sector, including machinery, transportation, construction, and other areas. Interest rate cuts usually help promote investment in the industrial sector and the advancement of infrastructure projects, especially for small industrial enterprises that may perform well when the market recovers.

First Trust Nasdaq Clean Edge Green Energy ETF (QCLN): In the clean energy industry, QCLN focuses on small cap stocks in the clean energy sector, covering related technologies such as solar, wind, and energy storage. As the global demand for green energy increases, small companies in this industry may benefit from reduced financing costs and policy support. The interest rate cutting environment usually provides more financing opportunities for the clean energy sector and drives the development of these innovative companies.

If you want to capture small cap opportunities in specific fields through industry ETFs, these ETFs are a good choice:

High growth industries such as biotechnology (XBI), healthcare (PSCH), and clean energy (QCLN) have high growth potential in the context of interest rate cuts and economic recovery.

Industries that are greatly affected by policies and interest rates, such as housing construction (ITB), industry (PSCI), and energy (FTXS), are often closely related to the macro economy, and interest rate cuts can promote investment and demand in these areas.

Based on your judgment and risk preference of various industries, you can choose suitable industry ETFs to allocate small cap stocks.

Disclaimer: The content of this article is for reference only and does not constitute investment advice. Investment carries risks, and caution is necessary when entering the market.

Meta’s performance is good, although the outlook is slightly worse, the stock price plummeted by 15% after hours.

The expected game is becoming increasingly important, with performance exceeding expectations skyrocketing directly to the target, and then adjusting significantly. If the performance falls short of expectations, the stock price will plummet directly. In the AI era, information mining is becoming more and more comprehensive, and quantitative trading with the help of AI is becoming more intelligent. The trading game in the market will become more and more significant.

Recently, the stock price trends of AMD and Lululemon have also fully illustrated this point. The impact of speculation on stock prices is becoming increasingly evident, especially in the short term, posing new challenges for investment management. Although in the long run, the fundamental trend determines the long-term performance of stock prices, the excessively volatile short-term fluctuations present a new severe test for asset management companies pursuing net asset value smoothing.

Even giant companies like Meta, Tesla, and Google often have to endure significant fluctuations in stock prices.

An important trend in the current financial market is that in the era of AI and big data, the processing and utilization of market information have become extremely efficient, leading to investors’ reactions to corporate performance expectations becoming more rapid and intense.

For large tech companies like Meta, the stock price changes after the release of financial reports are often closely related to market expectations.

• The Importance of Expectations: Market expectations play an increasingly crucial role in today’s stock trading. Investors not only focus on a company’s actual performance but also on how these results compare to market expectations. If the performance exceeds expectations, the stock price may experience a significant short-term increase; conversely, it may face a sharp decline if it falls short of expectations.
  
  
• The Impact of AI and Quantitative Trading: The advancement of AI technology has accelerated the development of quantitative trading strategies, which can analyze large amounts of data in a very short time frame to make trading decisions. This high-frequency, algorithm-based trading can amplify market reactions, sometimes leading to drastic price fluctuations within minutes of financial report releases.
  
  
• Adequacy of Information Mining: Modern information technology has made it easier and faster to extract information from various data sources. This includes social media, news reports, industry analyses, etc., all of which could influence market sentiment and expectations even before the public release of financial reports.

This environment requires investors not only to focus on fundamental analysis, but also to understand market sentiment and trading psychology, and how they may impact stock prices in the short term. At the same time, this also brings new challenges for regulatory agencies in ensuring market fairness and transparency.

A new era is unfolding, and the paradigm of investment must make corresponding adjustments.

The significant fluctuations in stock prices of giant companies such as Meta, Tesla, and Google can be attributed to various factors, but can be summarized into the following key points:

• High expectations and strict market expectations: These tech giants often bear extremely high investor expectations due to their innovation, market leadership, and rapid growth history. Market expectations set a very high standard, where even slight deviations in performance could lead to significant fluctuations in stock prices. For example, if their financial reports slightly miss analysts’ expectations or future revenue forecasts are lowered, stock prices may adjust rapidly.
  
• Market sentiment and speculative behavior: Tech stocks are usually greatly influenced by market sentiment. During optimistic market conditions, the stock prices of these companies may be excessively inflated; while during pessimistic or uncertain times, these stocks may also be oversold. Additionally, due to the visibility and liquidity of these companies, they become popular choices for speculators, further exacerbating stock price volatility.
  
• Macroeconomic and industry dynamics: Macroeconomic changes (such as interest rate fluctuations, inflation, economic recessions, etc.) affect all stocks, but have a particularly significant impact on tech giants. Furthermore, industry competition dynamics, technological innovations, regulatory changes, etc., also directly affect the stock prices of these companies.
  
• Global events impact: As these companies operate globally, any geopolitical events, international trade policy changes, or other global crises can affect their stock prices. For example, trade wars, data privacy issues, etc., have all impacted the stock prices of tech companies.
  
• Role of algorithms and quantitative trading strategies: The widespread use of AI and quantitative trading has made market reactions faster and more intense. These high-frequency trading strategies can amplify market reactions in a very short period, leading to increased stock price volatility.

Understanding the interaction of these factors is crucial for investors to make wise decisions when facing market fluctuations. Despite these companies typically having strong fundamentals and good long-term growth prospects, their stock prices may still experience significant volatility in the short term.

For asset management companies, the demands are increasing.

The stock price fluctuations of companies like AMD and Lululemon do reflect the market’s rapid response to various information in the short term, as well as the heightened strategic elements in investment strategies.

For investment management companies, these short-term sharp fluctuations do present new challenges, especially for those companies seeking smooth growth of asset net value, requiring more sophisticated and adaptive management strategies.

Strategies to deal with short-term fluctuations.

• The application of risk management tools: Using derivatives such as options and futures to hedge risks can help manage the uncertainty brought by market fluctuations. For example, purchasing put options can protect positions from significant downturns.
  
• Flexibility in capital allocation: Adjusting capital allocation in different market environments is crucial in dealing with short-term volatility. This may involve increasing cash holdings when market volatility intensifies, allowing for the opportunity to buy quality assets at lower prices after market corrections.
  
• Balancing short-term and long-term objectives: While pursuing long-term growth, it is important to set reasonable short-term goals and expectations. This includes accepting market fluctuations as part of investing and developing a long-term robust growth strategy based on this understanding.
  
• Integration of technical and sentiment analysis: While fundamental analysis is the cornerstone of long-term investment success, in the short term, technical analysis and market sentiment analysis are also crucial. Understanding market sentiment and technical indicators can help investors better comprehend and predict short-term price fluctuations.
  
• Continuous education and training: Asset management companies should enhance continuous education and training for their staff, especially in financial technology, market psychology, and advanced risk management strategies. This ensures that the team can utilize the latest tools and strategies to optimize portfolio performance.

Through these strategies, asset management companies can not only better cope with short-term market volatility, but also steadily increase the value of assets in the long term, achieving investment objectives.

In the long run, our investment paradigm must make long-term adjustments and changes.

In the current investment environment, it is indeed necessary to adjust traditional investment strategies. Here are a few strategic suggestions to help investors deal with market high volatility and rapid changes:

• Enhancing Fundamental Analysis: Even in highly dynamic markets, solid fundamentals remain the key to long-term investment success. Investors should delve into analyzing a company’s financial condition, industry position, growth potential, and the capabilities of its management team. A deeper understanding of a company’s fundamentals can help investors stay calm during market fluctuations, avoiding making impulsive decisions influenced by market sentiment.
  
• Diversifying Portfolio: Diversifying investments across different industries, regions, or asset classes can effectively reduce the impact of a single event on the entire investment portfolio. This strategy helps mitigate the negative effects of a single market or industry and provides more stable returns.
  
• Flexible Investment Strategy: Adapting flexibly to market changes, including using different investment tools and strategies. For example, one can consider using options strategies to manage risks or adjust stock holdings when necessary to cope with market fluctuations.
  
• Long-Term Perspective: Maintaining a long-term investment perspective and avoiding frequent trading due to short-term market fluctuations. Long-term investment holdings can often offset the negative impact of short-term volatility and benefit from a company’s growth.
  
• Improving Financial Knowledge and Skills: In today’s era of increasing popularity of AI and quantitative trading, investors need to enhance their financial knowledge and skills to understand how these new technologies affect market dynamics. This includes understanding algorithmic trading, market sentiment analysis tools, and how to use these tools to optimize investment decisions.
  
• Dynamic Adjustment of Expectations: Investors need to continuously adjust their expectations and strategies based on the latest market dynamics. This involves regularly evaluating the performance of the investment portfolio while paying attention to changes in macroeconomic conditions, industry trends, and specific company situations.

By implementing these strategies, investors can better adapt to the current complex and ever-changing market environment, while protecting and growing their investments.

SpaceX, the world’s second most valuable startup, is on the verge of reaching a valuation of $210 billion, a development that has garnered widespread attention. According to insiders, SpaceX is set to sell its internal shares at a price of $112 per share, which is higher than the $200 billion valuation discussed last month.

The success of SpaceX is not only reflected in its breakthroughs in the field of commercial spaceflight but also in its unique business model and spirit of innovation. Founded by Elon Musk, the company’s main businesses include providing transportation services to the International Space Station, launching commercial satellites, and developing reusable rocket technology. These innovations have not only reduced the cost of space travel but also provided new possibilities for human exploration of the universe.

Financially, SpaceX’s valuation growth reflects the market’s recognition of its long-term development potential. According to the article “Pricing Analysis of Target Companies in Mergers and Acquisitions,” the core of a company’s value lies in its potential for growth and expectations for future profitability. SpaceX has attracted significant attention from investors by leveraging its leading position in space technology and continuous technological innovation.

Furthermore, SpaceX’s valuation is closely related to its performance in the capital market. According to the research “Investor Sentiment and the Cross-Section of Stock Returns,” investor sentiment has a significant impact on stock returns. SpaceX’s ability to maintain high activity in the capital market is partly due to its growing market influence and investors’ optimistic expectations for its future development.

In summary, SpaceX’s valuation reaching $210 billion is a comprehensive recognition of its technological innovation, market performance, and future development potential. As global interest in space exploration increases, SpaceX is expected to continue expanding its market share and driving the development of the entire space industry.

How is SpaceX’s current market valuation calculated?

SpaceX’s market valuation is primarily determined through its financing activities. In 2017, SpaceX completed an H round of financing, raising $351 million, which valued the company at $21.2 billion at the time. This valuation was assessed based on investors’ confidence in its future growth potential and business model. Generally, a company’s market valuation takes into account a combination of factors such as its financial condition, market performance, industry position, and potential growth opportunities.

Although the evidence mentions the valuation issues of SPACs (Special Purpose Acquisition Companies), this is not directly related to SpaceX’s market valuation calculation method. SPACs are a specific investment tool used for acquiring other companies, while SpaceX, as a mature company that has completed multiple rounds of financing, relies more on traditional financial analysis and market assessment methods for its market valuation.

What are SpaceX’s latest technological breakthroughs in the commercial space sector?

SpaceX’s latest technological breakthroughs in the commercial space sector mainly include the following aspects:

Reusability Technology: SpaceX’s Falcon 9 and Falcon Heavy launch vehicles have achieved multiple launches and recoveries, significantly reducing the cost of space missions. This technology not only increases the utilization rate of rockets but also reduces the need for manufacturing new rockets.

Starlink Project: By deploying a large number of small satellites, SpaceX is building a global satellite internet network. This step marks an important move by the company in providing global communication services.

Starship Project: This is an ambitious project by SpaceX aimed at developing a vehicle capable of sending humans into deep space, including missions to Mars. The Starship design allows it to carry more payload and offers greater flexibility and cost-effectiveness.

Raptor Engine: This is a new type of rocket engine manufactured using 3D printing technology for SpaceX’s Dragon spacecraft and other spacecraft. The engine is designed to improve propulsion efficiency and reliability.

Crew Dragon: SpaceX successfully conducted an unmanned test flight of the Crew Dragon and plans for manned flights. This marks SpaceX becoming the second entity, after Russia, capable of independently sending astronauts to the International Space Station.

How does SpaceX impact the operations and future planning of the International Space Station (ISS)?

SpaceX has significantly impacted the operations and future planning of the International Space Station (ISS), mainly in the following aspects:

Promoter of Commercial Spaceflight: Since the early 21st century, with the retirement of the U.S. Space Shuttle, NASA faced challenges in cargo transportation to the ISS. To address this challenge, NASA initiated the Commercial Orbital Transportation Services/Commercial Resupply Services program and chose SpaceX as one of its partners. This marked a shift in U.S. manned spaceflight towards commercialization, and SpaceX’s success not only restored the ability to transport cargo to the ISS but also paved new ways for future manned space development.

Technological Innovation and Cost Reduction: SpaceX has significantly reduced the cost of accessing space through technological innovations in its Falcon 9 series of launch vehicles. This low-cost launch capability enables SpaceX to provide more frequent and economical access to space services, thereby enhancing its competitiveness in ISS operations.

International Collaboration and Conflict Management: SpaceX plays a crucial role in international space exploration, establishing cooperative relationships with multiple countries, regions, and organizations. These collaborations, though bringing conflicts and issues, have been successfully resolved by SpaceX through effective project management and knowledge sharing strategies. This cross-functional team approach and emphasis on diverse partnerships provide valuable experience for future international cooperation.

Attention to Space Weather: SpaceX’s Starlink initiative demonstrates the company’s high attention to space weather changes. For example, a minor geomagnetic storm led to the loss of 49 Starlink satellites, forcing SpaceX to adjust its launch strategy to launch satellites at higher initial orbits and reduce the payload per mission. This flexible response to space weather changes is crucial for ensuring the safety of the ISS and surrounding space activities.

Impact on Future Planning: SpaceX’s reusable launch vehicle technology, such as the recovery of the Falcon 9’s first stage, not only reduces the cost of space travel but also makes deep space exploration and Mars colonization possible. Furthermore, SpaceX’s global perspective and technological innovation capabilities position it as a key participant in future ISS expansion and international cooperation.

SpaceX, through its technological innovation, cost-effective services, international cooperation, and attention to space weather, has a profound impact on the operations and future planning of the International Space Station.

How has SpaceX’s performance in the capital market changed in recent years, especially in terms of stock price and market value?

As a high-tech company, SpaceX’s performance in the capital market has attracted widespread attention in recent years. Although my search focused on the market dynamics of SPacs (special purpose acquisition companies), we can infer some trends in the capital market that may indirectly affect the market performance of high-growth potential companies like SpaceX.

Looking at the rise and changes of SPACs, before 2020, SPACs accounted for a relatively small share of the U.S. IPO market, but in 2020, they reached a peak, with the financing amount of companies going public through the SPAC model exceeding that of traditional IPO models for the first time. This indicates that during the pandemic, investors were more open to seeking high-return investment methods, which may also provide a favorable capital market environment for high-tech companies like SpaceX.

However, it should be noted that although SPACs attracted a large amount of capital in the short term, they may lead to poor stock performance in the long term. According to a study, there is a characteristic of long-term weakness in the stock prices of SPAC-listed companies, mainly due to the decrease in investment returns and the increase in arbitrage of SPAC investors. This means that if SpaceX chooses to go public through the SPAC model, its stock price may face certain challenges.

In addition, both U.S. IPO activities and SPAC activities have increased in recent years, especially peaking in 2021, but declined in 2022. This volatility may pose risks to potential listing companies like SpaceX, as changes in market sentiment may affect investors’ interest in their stocks.

SpaceX’s performance in the capital market may have been affected by the dynamics of the SPAC market in recent years. Although SPACs provide a quick way to go public, there may be risks of poor stock performance in the long term.

What factors underlie investors’ optimistic expectations for SpaceX’s future development?

Investors’ optimistic expectations for SpaceX’s future development are mainly based on the following factors:

Technological innovation and market leadership: As a pioneer in the commercial space sector, SpaceX’s technological innovations and leading position in rocket technology, space transportation systems, and the Starlink initiative provide a solid foundation for the company’s future growth. Despite challenges such as the rocket explosion in 2016, these setbacks have not hindered SpaceX from continuing to advance its commercial space launch services.

Support from the capital market: Through financial instruments like Special Purpose Acquisition Companies (SPACs), SpaceX can quickly obtain capital from the capital market to accelerate its business expansion and technology development. Although SPAC mergers are usually accompanied by high expected growth rates, this also reflects the market’s recognition of SpaceX and its potential value.

Participation of institutional investors: According to research, high-quality investors participating in SPACs tend to bring higher success rates and announcement day returns. These investors typically have deeper industry knowledge and resources, and their involvement increases market confidence in SpaceX’s future development.

Market response and investor behavior: Despite concerns that SPAC information disclosure may mislead small investors, studies show that announcements containing more forecast information are associated with positive market responses, indicating that the market is optimistic about SpaceX’s future development.

Policy and regulatory environment: As global interest in space exploration increases, governments and international organizations around the world may introduce more policies and measures to support the development of commercial spaceflight, providing more development opportunities for companies like SpaceX.

Investors’ optimistic expectations for SpaceX’s future development are based on its technological innovation capabilities, the active support of the capital markets, the participation of institutional investors, and a favorable market and policy environment.

Core viewpoints:

1. The Israeli-Palestinian conflict does not significantly impact crude oil prices. The end of the November rate hike may present a buying opportunity for gold.
2. Value stocks are no longer attractive in a high-interest environment. After the adjustment of growth stocks, it may be time to gradually reduce holdings.
3. Disappointing results in the Q3 industrial reshoring sector, with hopes for a simultaneous outbreak with the software and services leaders in Q4.

01
The situation in Israel and Palestine has triggered a tumultuous autumn. Where are crude oil and gold headed?

As one crisis subsides, another emerges. The Russia-Ukraine conflict has descended into a quagmire, while intense clashes erupt between Palestine and Israel. These two major international events force the market to analyze them within the realm of capital markets. Prior to the Russia-Ukraine conflict, we witnessed a sharp rise in international oil prices, gold, and agricultural futures within a month. Looking at the current situation, will the market trend follow a similar pattern?

In fact, before the Israeli-Palestinian conflict began, international oil prices surged by about 10% in a month, thanks to the continuous production cuts by the OPEC+. However, this increase was completely wiped out within a week in October. There are rumors that the United States and Saudi Arabia have reached agreements that could lead to the self-destruction of oil-producing countries.

At the same time, since the outbreak of the Israeli-Palestinian conflict, oil prices have not experienced a significant rebound, as the supply-demand dynamics have not fundamentally changed. It is evident that the impact is not on the same scale as the Russia-Ukraine war. Furthermore, historically, oil prices have shown a negative correlation with the US dollar and US bond yields. Currently, both the US dollar and US bond yields have been at high levels for an extended period, which has also prevented oil prices from breaking through resistance levels.

Similarly, gold prices have also been suppressed by real interest rates on US bonds. The program points out that the rapid rise in medium to long-term US bond yields in recent months has exerted the greatest pressure on gold prices, and the scale of the Israeli-Palestinian conflict is also insufficient to stimulate gold prices.

However, compared to crude oil prices, financial commentator I believes that there may be better investment opportunities in gold. Especially as the rate hike approaches its end, and real interest rates are clearly peaking and falling, gold is expected to rise. This “quality” buying opportunity may come after the November interest rate meeting this year.

02
Value stocks are experiencing a rare collapse. What is happening and how to navigate through the fog to win in Q4?

Even Buffett’s beloved Coca-Cola has collapsed! Recently, several value stocks in the United States have seen rare declines, including consumer goods giant PG, the largest clean energy supplier NEE, and others. Behind them, the daily consumer goods index, non-daily consumer goods index, and utility index have also plummeted. What is going on?

The program summarized three main factors:

1. Recently, the total amount of consumer credit in the United States unexpectedly decreased, leading to an overall weakening of consumption. The rise in real interest rates has also put pressure on demand.
2. Bond yields have risen, making bonds a more attractive choice. As the dividend yield of value stocks is lower than bond rates, their attractiveness has decreased.
3. The unrealized losses in the U.S. banking sector continue to rise, causing concerns about financial stability. Nevertheless, in this context, growth stocks have performed no worse than value stocks, especially in industries related to artificial intelligence.

So, how should investors allocate their assets in this situation?

In a high-interest-rate environment, value stocks may indeed not be as appealing. Currently, factors such as weakening consumption, concerns about financial stability, and profit pressures still exist. However, in the short term, growth stocks are expected to outperform value stocks, especially leading companies related to the theme of artificial intelligence.

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The quarterly reports are coming, which giants will be the first to usher in a rebound opportunity?

In the past Q3, the giants went through an adjustment period and faced a situation where valuations deviated from historical averages, especially with relatively poor performance from Apple (AAPL) and Microsoft (MSFT). In contrast to the weakness of the giants, the second and third-tier software leaders, such as SPLK, CRWD, ESTC, have stood out, and these high-quality targets have been repeatedly mentioned in “Outperforming US Stocks”.

Looking ahead to the Q4 quarter, I expect that the performance of giant companies is likely to improve, mainly benefiting from the resilience of the U.S. economy. Currently, the inventory in the real estate market has reached its lowest point in 40 years, a new round of real estate cycle is on the rise, industrial reshoring is accelerating, and the construction amount of U.S. industrial plants continues to hit new highs, which will further release profits.

Furthermore, the development of the artificial intelligence industry will also drive overall profit growth in the U.S. stock market. I am optimistic about the performance release of giants such as MSFT, GOOGL, TSLA.

On the other hand, I continue to emphasize that software services are still a top priority in Q4, especially companies related to AI. As the supply of AI chips gradually resolves, explosive growth from AI chips to applications usually takes some time, and it is expected to see a flourishing situation in about a year. This also means that leading software service companies will perform strongly during this period.

In addition, the reshoring sector in the industrial field is also a sector worth continuing to focus on. Recently, European and American countries have embraced the trend of reindustrialization, with a noticeable improvement in manufacturing employment in the United States. Therefore, focusing on the two core areas of automation equipment and capital expenditure expansion is recommended, especially ADSK and ANSS.

Reference article: WeChat Official Account “The Stock Intelligence Agency “

What are the good performing assets to start the interest rate cut cycle?

The global economy has entered a new stage, and central banks have begun to cut interest rates to stimulate the economy. Investors need to readjust their investment portfolios and look for assets that have performed outstandingly in the interest rate cuts.

As an efficient and diversified investment tool, exchange traded funds (ETFs) have become the preferred choice for investors.

Which ETFs are worth paying attention to during the interest rate cut cycle? Below we will provide you with a detailed analysis!

The impact of interest rate cuts on the market

Cutting interest rates will lead to a decrease in the coupon rate of newly issued bonds and an increase in the price of already issued high-yield bonds, especially long-term bonds;

Reducing the financing costs of enterprises, increasing profit margins, and overall boosting the stock market. Defensive sectors benefit first, while growth and cyclical sectors relay;

The weakening of the US dollar may push up the prices of commodities priced in US dollars, such as gold and industrial metals; 

The decrease in mortgage loan interest rates has stimulated demand in the real estate market.

Debt ETF: Enjoy the dividend of interest rate reduction

Long term treasury bond bond ETF:

1. iShares 20+ Year Treasury Bond ETF (TLT)
2. Vanguard Long-Term Bond ETF (BLV)

At the initial stage of interest rate reduction, the yield of long-term treasury bond will decrease and the price will rise. Long term treasury bond ETFs have bought a lot of long-term treasury bond. When the interest rate drops, they can make a profit. This kind of investment is suitable for investors who do not like taking risks and want to make money steadily.

In the past interest rate cutting cycles, ETFs of long-term treasury bond bonds such as TLT have performed well, with yields significantly higher than those of short-term bonds and money market funds.

High Yield Bond ETF

1. iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
2. SPDR Bloomberg High Yield Bond ETF (JNK)

Interest rate cuts have reduced corporate financing costs, improved the financial situation of high-yield bond issuers, and lowered default risks. The credit spread of high-yield bonds may narrow and prices may rise. In addition, high-yield bonds have higher coupon rates, which can provide objective interest income.

It should be noted that high-yield bonds, also known as “junk bonds,” have higher risks than investment grade bonds. Investors should invest cautiously based on their own risk tolerance.

Stock ETF: From Defense to Growth Defense ETF

1. Utilities Select Sector SPDR Fund (XLU)
2. Consumer Staples Select Sector SPDR Fund (XLP)

In the early stages of interest rate cuts, market uncertainty is high and funds often flow into defensive sectors. The public utilities and essential consumer goods industries have stable cash flows and high dividend yields, providing investors with defensive investment options.

Growth oriented technology stock ETF

1. Invesco QQQ Trust (QQQ)
2. ARK Innovation ETF (ARKK)

In a low interest rate environment, the discounted value of future cash flows increases, leading to an increase in the valuation of growth technology companies. The technology industry has high growth and innovation capabilities, and can generate excess returns during interest rate cuts. In previous interest rate cut cycles, technology ETFs such as QQ often performed better than the overall market index, bringing substantial returns to investors.

Cyclical industry ETF

1. Financial Select Sector SPDR Fund (XLF)
2. Industrial Select Sector SPDR Fund (XLI)

With interest rate cuts stimulating economic recovery, the profitability of cyclical industries has improved. The financial industry benefits from the increased demand for loans, while the industrial industry benefits from the growth of capital expenditures and infrastructure investments.

Commodity ETFs: Opportunities for Precious Metals and Industrial Metals

Gold ETF

1. SPDR Gold Trust (GLD)
2. iShares Gold Trust (IAU)

Interest rate cuts typically lead to a weakening of the US dollar and an increase in inflation expectations. As a safe haven asset and anti inflation tool, gold’s demand and price may rise. Gold ETFs provide a convenient way to invest in gold without actually holding physical gold.

Industrial Metal ETF

1. iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC)
2. Invesco DB Base Metals Fund (DBB)

The economic recovery has driven industrial production and infrastructure construction, increasing the demand for industrial metals such as copper and aluminum. Industrial metal prices have risen, benefiting related ETFs. For investors who are optimistic about global economic growth, this is an area worth considering.

Real Estate ETFs: Winners in Low Interest Rate Environments

Residential Real Estate ETF

1. iShares U.S. Home Construction ETF (ITB)
2. SPDR S&P Homebuilders ETF (XHB)

The interest rate cut has lowered the mortgage loan interest rate, lowered the cost of buying a house, and stimulated housing demand. Residential real estate ETFs investing in residential construction companies and related industries can directly benefit from the recovery of the real estate market.

Commercial Real Estate ETF

Vanguard Real Estate ETF (VNQ)

Schwab U.S. REIT ETF (SCHH)

Low interest rates have reduced the financing costs of commercial real estate companies and increased the attractiveness of real estate investment trusts (REITs). As economic activity increases, rental income and asset value of commercial real estate may rise.

Emerging Market ETFs: Benefiting from Capital Inflows and Weakness of the US Dollar

Emerging Market Bond ETF

1. iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)

The weakening of the US dollar and the trend of global funds seeking high-yield assets may drive capital inflows into emerging markets. Emerging market bond ETFs investing in US dollar denominated emerging market bonds can benefit from price increases brought by capital inflows while obtaining higher returns.

Emerging market stock ETF

1. Vanguard FTSE Emerging Markets ETF (VWO)

Emerging market countries may perform outstandingly in the global economic recovery, and their stock markets have high growth potential. Emerging market stock ETFs provide broad market coverage and are suitable for investors seeking diversification and high growth.

Interest rate cuts bring more investment opportunities to everyone, but the market will also be more volatile and uncertain. Investors need to adjust their investments based on their risk tolerance, investment time, and how much money they want to earn.

ETF, as an investment tool, is convenient to buy and sell, transparent in information, and low in cost, which can help investors diversify risks and seize profit opportunities.

Disclaimer: The content of this article is for reference only and does not constitute investment advice. Investment carries risks, and caution is necessary when entering the market.

In-Depth Analysis of the Global IT Failure Caused by CrowdStrike Software Update

On July 19, 2024, CrowdStrike released a sensor configuration update for the Windows system, leading to the collapse of millions of Windows systems worldwide. This incident not only affected the normal operations of global businesses and users but also triggered widespread political and regulatory attention. Below is a detailed analysis of this event.

Event Course

Cause

• Time: July 19, 2024, 04:09 UTC

• Action: CrowdStrike released a sensor configuration update aimed at enhancing the protection capabilities of its Falcon sensor.

• Result: The update triggered a logical error, leading to system crashes and blue screens of death (BSOD).

Impact Scope

Global Impact: It is estimated that 8.5 million Windows devices worldwide were affected, accounting for less than 1% of the total number of devices globally, but due to the widespread deployment of CrowdStrike, its impact was far-reaching.

Industry Impact: The normal operations of various industries were impacted, with examples including the cancellation of 1,848 flights worldwide, affecting regions such as the United States, Australia, India, and Canada.

Root Cause Analysis

1. Issues with the Update Content

• Logical Error: The logical error in the update failed to correctly handle certain system calls, leading to operating system crashes and blue screens.

1. Flaws in the Update and Testing Process

• Insufficient Testing Coverage: The testing before the update may not have covered all possible usage scenarios and system configurations, leading to undiscovered issues under specific conditions.

• Lack of Multilevel Verification: There was a lack of adequate multilevel verification before the update was released, failing to discover and fix problems within a small scope.

3. Complexity of Kernel-Level Monitoring

• High Permissions and High Risks: Kernel-mode drivers require high permissions to operate, and any errors can directly lead to system crashes.

• Insufficient Complexity Management: The complexity of kernel-mode operations requires stricter management and testing processes.

Solutions and Preventive Measures

1. Strengthen Testing and Verification

• Increase Automated Testing Coverage: Introduce more automated testing tools to cover more usage scenarios and edge cases.

• Enhance Stress Testing: Conduct stricter stress tests under high loads and complex conditions.

2. Improve the Update Process

• Gradual Release Strategy: Adopt a gradual release strategy, testing and verifying in a small scope first before gradually rolling out to all customers.

• Multilevel Verification: Increase multilevel verification before updates, including internal testing, partner testing, and customer testing.

3. Enhance User Feedback Mechanisms

• Rapid Response Mechanism: Establish a rapid response user feedback mechanism to collect and address customer-reported issues in a timely manner.

• Real-Time Monitoring: Closely monitor system operation status after the update is released to identify and resolve potential issues promptly.

The global IT failure caused by the CrowdStrike software update reveals the high risks and complexities of kernel-level monitoring. Although kernel-level monitoring provides strong security protection capabilities, its efficiency also comes with high risks. To prevent similar issues from recurring, CrowdStrike needs to strengthen testing and verification, optimize the update process, and enhance user feedback mechanisms. Through these measures, similar issues can be effectively prevented, ensuring system stability and security.

In-Depth Analysis of the Impact Scope

The global IT failure caused by the CrowdStrike software update on July 19, 2024, not only had a profound impact on business operations, economic systems, and CrowdStrike itself but also exposed the potential risks of kernel-level monitoring in the field of cybersecurity. Below is an in-depth analysis of the impact scope of this event.

1. Impact on Business Operations

Business Interruption

• System Unavailability: Due to blue screens and system crashes, businesses’ critical systems and services cannot operate normally, leading to business interruptions.

• Long Recovery Time: Recovery requires manual operation for each device, including restarting and deleting incorrect file updates. For large enterprises with thousands of Windows devices, recovery time may take days or even weeks.

Decreased Productivity

• Employees Unable to Work: System crashes prevent employees from accessing applications and data needed for work, significantly decreasing productivity.

• Business Losses: Business interruptions and decreased productivity directly lead to economic losses. For example, production halts in manufacturing,受阻零售业 sales, and delayed transactions in finance.

2. Impact on the Global Economy

Macroeconomic Shocks

• Aviation Industry Hit: The cancellation of 1,848 flights worldwide affected aviation transportation and tourism in multiple countries, resulting in significant economic losses.

• Supply Chain Disruptions: Many businesses rely on stable IT systems to manage supply chains, and system crashes lead to supply chain disruptions, affecting production and delivery.

Corporate Financial Losses

• Direct Losses: Direct financial losses due to business stagnation, order cancellations, and customer loss.

• Indirect Losses: Businesses may need to pay additional IT support and maintenance costs for disaster recovery and system repair, and they may also face legal litigation and compensation.

3. Impact on CrowdStrike

Reputation Loss

• Decreased Customer Trust: The incident exposed CrowdStrike’s shortcomings in update management and testing processes, which may decrease customer trust in the stability and security of its products.

• Market Reaction: Due to the widespread impact of the incident, CrowdStrike may face a decline in market share and competitors may take the opportunity to encroach.

Political and Regulatory Scrutiny

• Increased Regulatory Pressure: Such a large-scale IT failure has attracted widespread attention, and CrowdStrike may face more political and regulatory scrutiny, needing to undergo more compliance and security reviews.

• Policy Changes: The incident may prompt governments and regulatory agencies to introduce stricter IT security management policies and regulations, requiring software vendors to provide higher security guarantees.

4. Industry Impact

Cybersecurity Industry

• Industry Trust Crisis: The incident exposed the potential risks of kernel-level monitoring, which may trigger a trust crisis across the entire cybersecurity industry.

• Technical Adjustments: Cybersecurity companies may need to re-evaluate and adjust their technical strategies to ensure efficient monitoring while reducing the impact on system stability.

Related Industries

• Financial Services: The financial services industry is highly dependent on IT systems, and system crashes may lead to delayed transactions, data loss, and decreased customer confidence.

• Manufacturing and Logistics: The operations of the manufacturing and logistics industry rely on real-time supply chain and production management systems, and system crashes can lead to production halts and delivery delays.

• Public Services: The disruption of IT systems in public services such as healthcare and transportation can have a significant impact on society, endangering public safety and service efficiency.

The global IT failure caused by the CrowdStrike software update has a wide and profound impact range. Business operations, the global economy, CrowdStrike itself, and the entire cybersecurity industry have all been significantly impacted. The incident reveals the current situation where the efficiency of kernel-level monitoring coexists with high risks, reminding businesses that while pursuing efficient security protection, they must pay attention to system stability and the rigor of update management. CrowdStrike and other cybersecurity companies need to adopt stricter testing and verification measures, optimize the update process, and strengthen user feedback mechanisms to prevent similar incidents from happening again.

Opportunities Arising

1. Competitor Benefits: Competitors such as Palo Alto Networks (PANW), Zscaler (ZS), and Microsoft may benefit from this, as customers may look for more reliable alternatives. Customers seeking certainty may turn to these competitors’ products.

2. Market Reaction: Due to the widespread impact of the incident, CrowdStrike may face a decline in market share and stock price fluctuations, and investors may re-evaluate CrowdStrike’s risk management and technical capabilities.

3. Regulatory Scrutiny: The massive scale of the incident may trigger more political and regulatory scrutiny, requiring CrowdStrike to provide higher security guarantees and transparency.

This CrowdStrike blue screen incident reveals the high risks and complexities of kernel-level monitoring. Although kernel-level monitoring can provide strong security protection capabilities, once a problem occurs, its impact range and severity will also be correspondingly magnified. To prevent similar issues from recurring, CrowdStrike needs to strengthen testing and verification, optimize the update process, and enhance user feedback mechanisms to ensure system stability and security. At the same time, market competition and trust crises will also prompt it to accelerate improvements to meet future challenges.

JPM: The future 10-year returns of US stocks are expected to decline significantly.

Next, let’s talk about a long-term topic, will the future of the US stock market be disappointing? This week, Morgan Stanley published a lengthy strategic report exploring this question. They believe that over the next ten years, the average annual return of the S&P 500 will be only 5.7%, significantly lower than the long-term 10%. So, what are the reasons for such low returns? Is it reasonable? How likely is it? And do investors need to prepare now? Let’s take a look together.

According to Morgan Stanley, based on their stock model’s forecast, the annualized return of the S&P 500 over the next 10 years will be only 5.7%, and over the next 20 years, it will be 8.1%. This will be lower than the post-World War II average return of 11%. They point out that the main reason for this low return is almost entirely due to one factor, which is valuation.

According to the data in the report, as of August 20th, the S&P 500’s price-to-earnings ratio for the past 12 months was 23.7 times, significantly higher than the 19 times average over the past 35 years, and statistically speaking, it is one standard deviation higher than the average of the 1990s, meaning there is only a 16% probability of it being higher than this level. If other valuation models are used, such as the cyclically adjusted price-to-earnings ratio (CAPE) or comparing it with the 10-year Treasury yield, the same conclusion is reached, that is, compared to history, the current US stocks are significantly overvalued. Therefore, Morgan Stanley believes that with this valuation level, it is more likely from a probability perspective to see mean reversion, and the valuation of US stocks in the future will at least return to the historical average of 19 times, and it is very likely to be even lower.

Aggie made a calculation. Currently, the market’s full-year profit forecast for the S&P 500 in 2024 is $242.6. Over the past 30 years, the profit growth of the S&P 500 has been around 7%. Assuming this remains unchanged, the profit level of the S&P 500 will reach $477.23 in 10 years. If the price-to-earnings ratio returns to 19 times at that time, the corresponding level for the S&P 500 would be 9067 points, representing a 61% increase from the current level. In comparison, if the S&P 500 maintains a valuation level of 23.7 times, the corresponding level would be 11310 points, a difference of 25%.

Of course, Morgan Stanley does not simply believe that mean reversion is more likely in the future based on statistics alone. There are four long-term factors that make this valuation decline difficult to avoid. The report indicates that these four factors all moving in unfavorable directions are the most concerning. These four factors are aging population, macro volatility, de-dollarization, and the national debt crisis.

First, let’s look at aging population. According to the latest global research, an aging population will lead to lower stock returns. The study found that for every 1% increase in the proportion of the population aged 65 and over, the average annualized return on stocks for the next ten years will decrease by 3%. Innovation capability and economic growth decline are two major reasons for this, but it is also influenced by the selling behavior of the elderly. They tend to abandon stocks and opt for more conservative investments like bonds, and are more motivated to cash out, causing greater selling pressure, leading to a compression of U.S. stock valuations. From the first chart, it can be seen that the proportion of U.S. household financial assets is at a historical high, indicating significant selling potential. However, Morgan Stanley’s analysis in the right chart reveals that the aging issue in the U.S. has only started to accelerate in the past 10 years, so the impact of this aspect has not been seen yet. The second chart shows the proportion of elderly people in the U.S. population. This trend is worrisome, continuously increasing the risk of future valuation compression.

Next is the macro volatility, which involves historical observations. Morgan Stanley pointed out that in the 1970s and early 1980s, due to the drastic fluctuations in inflation, it led to much lower valuations of US stocks compared to now. In the future, deglobalization, geopolitical risks, and the increase in neutral interest rates could all potentially cause inflation to no longer be able to sustain at low levels as before, requiring governments and central banks to implement more macroeconomic controls to suppress the possibility of future inflationary pressures. Such long-term uncertainties could result in a decline in the valuation of US stocks. However, Morgan Stanley mentioned that this viewpoint has not proven to be accurate so far, as it might still be too early, and they do not recommend clients to overly consider this factor.

Regarding de-dollarization and the sovereign debt crisis, Morgan Stanley stated that both are still only risks and have not become a reality affecting US stocks. In fact, if they were to materialize, it would likely be accompanied by severe economic or political turmoil, which would inherently be detrimental to US stocks. The impact of de-dollarization on US stocks would imply a weakening of investor confidence in the US economy itself. For now, these risks are still distant, but there is a trend towards increased de-dollarization that requires some attention.

The national debt crisis is a long-standing issue that many people worry about due to the continuous increase in the volume of U.S. government bond issuance, which may require higher yields to attract enough buyers, leading to an increase in U.S. bond yields. In theory, stock yields should also rise accordingly to compensate investors for the additional risks they bear. Stock yield is the reciprocal of the price-to-earnings ratio, so when the yield is higher, the price-to-earnings ratio will be lower, compressing the valuation of U.S. stocks. However, according to Morgan Stanley, in reality, when the national bond yield rises by 1%, stock yields will only increase by 0.1%, which has a very small impact. It is unclear when theory will translate into reality, but one thing is certain: the trend of excessive national debt issuance will not change, so this risk is gradually increasing.

Aggie believes that among the four major factors listed by Morgan Stanley, the aging population issue is the most critical because the change in population structure is a definite long-term variable, and the weakening of demand and creativity in old age will not change, posing a real risk to the valuation of U.S. stocks. The other variables contain too many uncontrollable factors, making it difficult to provide guidance for investors, so they should be monitored without excessive worry.

So, will the future returns of the US stock market really be disappointing? Not necessarily. Aggie believes that it is not appropriate to simply compare current valuations with historical averages, as the US stock market today is completely different from 40 years ago. In fact, the average valuation of the US stock market was only around 10 times 40 years ago. If we were to make such a comparison, the US stock market has been overvalued for over 40 years. Aggie also believes that this report overlooks the impact of technological changes on the US stock market, with AI being a key factor. I am personally very confident in the future of AI, as I believe it can significantly improve companies’ profitability, potentially leading to a higher earnings growth rate for the S&P 500 in the future. An increase in earnings growth rate usually implies an expansion of valuations, which is a point of optimism for the future. Of course, I do not deny that current valuations of the US stock market are high, and the development of AI not meeting expectations poses a significant risk. I just want to remind everyone that instead of focusing on the conclusions of this report, it is better to clarify the underlying factors and logic. This will provide greater assistance for our investments.

Reference article: WeChat Official Account “MeiTouinvesting”

Let’s start by taking a look at the most important non-farm payroll data. This time, the data can be described as extremely exaggerated.

The data shows that there were 254,000 new positions added, while the expectation was 140,000, nearly double the expected amount. The data from the previous two months has also been revised upwards, with an increase of 17,000 in August, bringing the total to 159,000, and an increase of 55,000 in July, resulting in a total of 144,000. The most crucial unemployment rate also dropped by 0.1 percentage point again, to 4.1%, lower than the expected 4.2%.

Such data could potentially directly reverse the perception of the labor market. Does this still count as cooling down? After the update of this data, the three-month average surged significantly to 186,000, far exceeding the previous 116,000. Powell used this number as a reason to support a 50-basis-point rate cut at the September meeting. Obviously, the possibility of a significant rate cut in November will be greatly reduced. On CME, the market’s probability of a 25-basis-point rate cut in November has soared to over 97%, compared to just 68% yesterday, almost completely confirming the magnitude of the rate cut at the next meeting.

So let’s take a look at which positions have driven this recent increase. Is the increase broad or localized? The positions that saw the largest increase this time were in leisure and hospitality, with a significant rise of 78,000 positions, followed by healthcare and social assistance, which increased by 72,000. Government positions increased by 31,000, ranking third. On the other hand, the sectors that saw the most significant decrease were transportation and warehousing, with a reduction of 8,600 positions, and manufacturing, which decreased by 7,000 positions. The Chief Economist at LPL Financial indicated that this job growth is relatively broad, raising the possibility that the economy in the fourth quarter will outperform expectations. The only thing to watch out for is the increase in the proportion of people holding multiple jobs, which has risen to 5.3%.

In this report, there is one shocking point, which is the situation revealed by the household survey. The Non-Farm Payrolls report consists of two surveys, one is the establishment survey and the other is the household survey. The new job positions come from the establishment survey, while the unemployment rate comes from the household survey. However, during this period, there has been a significant discrepancy between the establishment survey and the household survey. The new job positions reported in the establishment survey have always been higher than those in the household survey, mainly due to individuals holding multiple jobs. In the establishment survey, one person may be counted in several positions, leading to criticism that the numbers are inflated. This was later confirmed when the new job positions reported in the establishment survey for the past year were revised down by 810,000.

However, in today’s report, it is surprising that the household survey shows stronger employment growth than the establishment survey, with an increase of 430,000 new jobs. Among them, full-time positions increased by 414,000, while part-time positions decreased by 95,000. How is this possible?

A senior economist at Group Economics explained that the sample sizes of the two surveys are different, with the establishment survey covering 650,000 businesses and the household survey covering 60,000 households. The establishment survey estimates the overall situation in the U.S. based on the impact of new and closing businesses, while the household survey is influenced by population and immigration. This time, it can be said that the impact of immigration was underestimated before, which is why the household survey shows such a significant increase in employment.

The strong growth in employment has also driven wage increases. In September, wages rose by 0.4% month-on-month, higher than the expected 0.3%, with an annual increase of 4%, surpassing the expected 3.8%. However, the average weekly working hours decreased by 0.1 hour to 34.2. Typically, average working hours are a leading indicator of the labor market, indicating that businesses may not be seeing high demand, thus reducing employees’ working hours, making it difficult for wages to continue to rise. One possible explanation is an increase in productivity. Nevertheless, the unexpected wage increase further indicates a strong labor market, reducing the urgency for the Fed to cut interest rates. The focus for the future is whether this exaggerated data will be revised downward, potentially altering our assessment of the labor market.

So, how will such hot employment data impact the market? Overall, it will only change market expectations for rate cuts, which is good news for corporate profits. Powell has also made it clear that the labor market is not the main driver of inflationary pressures at the moment. As long as this overall assessment remains unchanged, the hot job market will not cause the same fears of rate hikes as before, but rather be a sign of a strong economy. Next, we need to see officials’ evaluations of this data and whether there are any new changes in their discourse. This is the most noteworthy impact of this latest nonfarm payroll report.

Since officials’ evaluations are so important, let’s take a look at today’s remarks from Chicago Fed President Goolsbee. He indicated that you can no longer ask for better employment data, especially with the suspension of the dockworkers’ strike. Both of these are very positive news for the economy. If we continue to receive similar data, I will be more confident that we are indeed maintaining full employment. Of course, he also emphasized that this is just one set of data, and the central bank should not overreact to it. Regarding inflation, Goolsbee also mentioned that some data suggest that inflation may remain below 2% in the future, and since the Fed’s interest rates are still far from neutral, it would be more appropriate to lower rates significantly in the next 12-18 months. This statement indicates that although the pace may slow down, the Fed’s rate cuts will continue, unaffected by the latest nonfarm payroll report.

Today, Fed spokesperson Nick also commented, stating that this data essentially closes the door on a 50 basis point rate cut in November, but they will still ensure a 25 basis point cut in the future. He then mentioned that this report also indicates that the job growth in July and August was not as weak as previously thought. Officials had been concerned that they might have been behind in cutting rates when they saw the job growth at that time, but this report clearly alleviated that concern. Nick also noted that Powell mentioned they were not in a rush to cut rates, and this report undoubtedly underscores that statement. A 25 basis point cut in November aligns with the Fed’s overall recalibration strategy.

Former Treasury Secretary Larry Summers and Soros’s former deputy Stanley Druckenmiller also commented on the latest non-farm payroll data. Summers believes that in hindsight, the 50 basis point rate cut in September was a mistake, though not one that would have significant consequences. He stated that this report confirms the need for caution in future rate cuts in a high neutral interest rate environment. Druckenmiller echoed this assessment, taking a more hawkish stance. He believes that the latest non-farm payroll report may have backed the Fed into a corner on future rate cuts. He said, “I hope the Fed won’t be trapped by forward guidance as it was in 2021. GDP is above trend, corporate profits are strong, the stock market is hitting record highs, credit is very tight, and gold is at new highs. Where is the tightening? The message here is that the Fed should be more flexible and not paint itself into a corner by continuing to cut rates just because it previously said it would. If monetary policy is not tightening, then there is no need to cut rates.”

Overall, the comments from various parties suggest that while the Fed is likely to continue cutting rates in the future, we should have cautious expectations regarding the magnitude and pace of future cuts. If interest rates cannot significantly decline, investments in rate-sensitive assets such as small-cap stocks and government bonds may be limited in their gains. This is something to keep an eye on.

Reference article: WeChat Official Account “MeiTouinvesting”

What impact will Trump’s victory have on the U.S. stock market?

Witnessing history, the dust settles. In the early hours of today, Trump reclaimed the White House, becoming the 47th President of the United States. The Republican Party also secured the Senate and is very likely to win the House of Representatives, achieving a red sweep. The market reacted swiftly, with the Dow Jones soaring by 3% today, marking its strongest performance in over two years. The small-cap Russell 2000 also surged by 4.5%, while Bitcoin hit a new high, briefly surpassing $75,000.

Last night, Trump took an early lead in all the swing states, securing victories in North Carolina, Georgia, Pennsylvania, and Wisconsin, ultimately winning with 277 to 224 electoral votes, becoming the 47th President of the United States. The significance of this victory is profound as Trump’s lead nationwide is even greater than in 2020, indicating a stronger support from the people. At the time of Agi’s deadline, the Republican Party also managed to flip 3 seats in the Senate, gaining control. Currently, the Republicans are also leading in the House of Representatives, only 18 votes away from a majority, achieving a true red sweep.

In the market, assets related to Trump’s presidency surged collectively, with Trump Media & Technology Group soaring 24% at the opening, and Tesla rising over 15%. Not to mention assets like Bitcoin and small-cap stocks. As a result, U.S. Treasury bonds fell, with the long bond ETF TLT dropping by 3%, causing a spike in bond yields, with the 10-year Treasury yield surpassing 4.4% and the 2-year Treasury yield approaching 4.3%. Clearly, Trump-related trading is unstoppable in the short term. For those who made money today, Agi would like to extend congratulations.

So, what is Wall Street’s initial assessment of this election result? Goldman Sachs has indicated that if the Republicans narrowly secure the House of Representatives, Trump’s tax cuts passed in 2017 will be extended promptly, with Republican lawmakers supporting further tax cuts to fulfill Trump’s campaign promises. However, the company believes that the final tax cut magnitude may not be as significant and will likely focus on income taxes initially. Defense spending may see a slight increase under Republican leadership, but overall fiscal expenditures will not expand significantly.

In terms of tariffs, Goldman Sachs points out that it is relatively easy to further impose tariffs on China. It is uncertain whether the 60% increase touted by Trump can be achieved, but adding another 20% on top of the current basis is highly likely. As for comprehensive tariffs, which means imposing at least a 10% tariff on all imported products, Goldman Sachs believes there is a 40% possibility, but it will definitely face strong resistance. If these tariff policies are implemented, it will ultimately lead to a one-time increase of 30-40 basis points in core PCE and will have a slight drag on GDP.

Regarding immigration, Trump’s presidency will certainly lead to a significant reduction in immigration, with preliminary estimates indicating around 750,000 per year, lower than the pre-pandemic level of 1 million per year. The key issue is that it is currently unclear how Trump plans to carry out his large-scale deportation of illegal immigrants, and what impact this will have on the economy.

The above is more of an economic evaluation. However, from an investment perspective, focusing solely on the election-related aspects, there are certain hidden concerns. It must be emphasized here that considering risks and political positions are unrelated. Many people see me summarizing some negative impacts of Trump’s policies and say I am anti-Trump. To be honest, I really am not.

So, what are these hidden concerns being referred to here? The biggest concern is inflation and the stance of the Federal Reserve. Whether it’s tax cuts, tariffs, or deporting immigrants, all have the potential to push up inflation and disrupt the Fed’s pace of interest rate cuts.

The market has also reacted accordingly. On the CME, the likelihood of the Fed pausing rate cuts in December is increasing, rising from 22% yesterday to 29%. The expected rate cuts for next year have also significantly decreased. Previously, the market expected rates to fall below 3% by the end of 2025, but now it’s 3.75%. This means that if the Fed cuts rates in December, it will only cut twice next year. The surge in US bond yields can also be understood as the market pricing in higher inflation. Overall, there is a continuation of higher and longer rate expectations.

So, one question that must be asked is whether the Federal Reserve will actually pause? In fact, we should consider two scenarios. The first scenario is that the Federal Reserve is still in a rate-cutting cycle, just choosing to skip a few meetings, which would have a smaller negative impact on the market. The second scenario is that the Federal Reserve, with interest rates still relatively high, decides to completely halt. This is undoubtedly the scenario the market least wants to see. Because once the Federal Reserve signals a complete halt, it could likely mean that the threat of inflation has become significant enough, perhaps in preparation for a rate hike. At that time, the market is very likely to once again fall into the rate hike panic seen at the beginning of 2022.

Bank of America says not to be too nervous. The Federal Reserve will not prematurely assess the economic impact of Trump’s policies, and is unlikely to act prematurely. However, if Trump does announce significant tariffs, the possibility of the Federal Reserve pausing will obviously increase. Nomura Securities believes that because the Federal Reserve misjudged inflation in 2021, it will be more cautious about any shifts, waiting for the one-time impact of tariffs to dissipate before considering a change in stance. In addition, the longer-term uncertainty surrounding the Federal Reserve has increased, as Trump has previously stated that he will not reappoint Powell. His term ends in May 2026. The next two years may cause market turmoil due to this.

So, does today’s sharp rise mean that all the good news has been released? Will there be a pullback in the future as emotions return to normal? Aggie believes that in the short term, the optimistic sentiment surrounding Trump’s victory will continue for a while, along with the risk release of the election outcome, so the current uptrend in the stock market should continue. Historically, it is also optimistic, as the two months following the election have seen very strong market trends. Therefore, we have reason to remain optimistic about the future performance of the U.S. stock market.

However, it must be noted that the market still has concerns about inflation and the Federal Reserve’s policy, which is the biggest risk in this current market trend. If these concerns come back into the spotlight in the future, it is not ruled out that the U.S. stock market may experience a pullback as a result. Here, Ajie believes that this risk can be divided into three levels. The most serious scenario, of course, is if the Federal Reserve signals a policy shift. This would lead to a fundamental change in investment logic, requiring specific analysis at that time. The second most serious scenario is if inflation starts to rise, but the Federal Reserve remains unchanged. In this case, I believe it is best for us investors to remain cautious and not blindly bet on a direction. The least serious scenario is when the market suddenly starts to worry about inflation and the Fed’s changes without any actual data support. Such an evolution may present an opportunity for us investors and is worth paying attention to.

Reference article: WeChat Official Account “MeiTouinvesting”

Bitcoin breaks through 88,000!

Many people attribute the recent surge in Bitcoin to Trump taking office. Indeed, Trump has been positioning himself as a candidate friendly to the cryptocurrency community since the beginning of the year. He even mentioned at a Bitcoin conference in July that he wanted to make Bitcoin a strategic asset for the United States and even launched his own cryptocurrency. However, upon closer examination, it seems that Trump’s influence may not be as significant as perceived.

Today, Bitcoin has once again hit a new record, surpassing $88,000 per coin, with exaggerated records even higher. Last week, The Bitcoin Archive tweeted that the world’s largest asset management group, BlackRock’s Bitcoin ETF, has surpassed their gold ETF in terms of fund size in just 10 months. Perhaps many are not aware of this. To put it in another way, BlackRock’s gold ETF was launched in 2005 and took nearly 20 years to reach its current size, while Bitcoin surpassed it in less than a year. This news is undoubtedly shocking. It is believed that many institutions on Wall Street are eagerly eyeing this opportunity. A clear signal since Trump took office is that regulation in the cryptocurrency space will become clearer, so during this period, various institutions are internally strategizing on how to seize this opportunity.

Forbes’ article today points out that institutions can no longer ignore Bitcoin. The article indicates that the reasons why institutions have previously rejected or ignored Bitcoin can basically be summarized into four points: legality, intrinsic value, channels, and volatility. Let’s explain them one by one.

Concerns about legality are actually evolving. Initially, institutions were worried that government bans would cause Bitcoin to plummet overnight. However, the ban by the Chinese government revealed that the entire ecosystem of Bitcoin is very resilient. Unless all countries in the world ban it together, it will continue to grow in places where it remains legal. Later, institutions were concerned that engaging in Bitcoin business would face regulatory crackdowns. The recent handling of Coinbase by the U.S. Securities and Exchange Commission is a typical example. With Trump now in office, the likelihood of regulatory crackdowns in the future is expected to decrease significantly. Therefore, the threat to the legality of Bitcoin and the entire cryptocurrency market has basically disappeared.

Concerns about intrinsic value, many people now believe that Bitcoin is like digital gold. However, in the beginning, the vast majority of people actually scoffed at Bitcoin, considering it virtual and devoid of any value. Those who do not understand the mechanism behind blockchain may also claim that Bitcoin’s supply can be tampered with at any time. However, is a network that cannot be eliminated by the government and can transfer large amounts of funds really without value? The answer is obviously negative. Now, with the introduction of Bitcoin ETFs, it has become a tool for asset allocation, so there is no longer any concern about its intrinsic value, but rather whether the price is reasonable.

The above two concerns are more fundamental, while concerns about channels and volatility are at the practical operational level. Now, with Bitcoin custody, Bitcoin ETFs, and the introduction of various financial instruments in the future, institutional investors have more choices. Not only is it easier to invest in Bitcoin, but various trading methods can also be used to control and adjust Bitcoin’s volatility. Therefore, according to Forbes, after regulatory clarity, more institutional funds that were previously on the sidelines choose to enter, driving up the price of the currency. Carwright, a pension fund in the UK, stated that UK institutional investors must catch up with other global players and start positioning themselves in Bitcoin, otherwise they will fall seriously behind. Their company suggests that in the first phase of pension funds, they can allocate about 3% to Bitcoin and gradually increase it. Obviously, institutional entry is one of the biggest bullish factors for Bitcoin.

Apart from institutional involvement, there are many bullish factors for Bitcoin, including major economies worldwide, except for Japan, entering a rate-cutting cycle, seasonal and cyclical factors, as well as the possibility of countries purchasing Bitcoin. Among these, seasonal and cyclical factors are worth mentioning separately. Those familiar with Bitcoin may know that Bitcoin operates on a four-year cycle, with the supply halving roughly every four years. Following each halving, Bitcoin tends to enter a bull market for about a year to a year and a half.

Some analysts in the cryptocurrency community believe that Trump’s presidency is merely a catalyst, and in terms of cycles, Bitcoin’s recent surge is just history repeating itself. The chart below summarizes Ecoinometrics’ findings. It shows that post-halving, Bitcoin’s performance is quite similar to previous cycles, lagging behind the first three cycles, and the current surge is merely catching up with historical trends. According to Coinglass’s analysis, the fourth quarter and the first quarter are generally the two best quarters for Bitcoin. The average increase in the fourth quarter is close to 85%, while in the first quarter, it exceeds 56%. Therefore, it is difficult to determine definitively which factor is prevailing.

Aggie believes that distinguishing whose influence is greater offers limited help for our investments. From a fundamental perspective, as long as Bitcoin continues to be more widely adopted, its value will increase. Whether the price rises due to cyclical trends or Trump’s presidency, it will attract more attention and increase adoption rates, that is certain. The skyrocketing price will also generate a certain level of FOMO sentiment, further boosting the upward trend. Therefore, I believe that in this fervent environment, Bitcoin’s upward momentum is likely to continue. However, amidst the frenzy, I would like to remind investors of the risks that they may overlook.

Firstly, within a Bitcoin bull market, there will naturally be significant pullbacks, which will not disappear just because of the frequent positive news, especially under such intense recent price surges, the risk of pullbacks has undoubtedly increased. Secondly, there is the risk of the Federal Reserve’s monetary policy. If the Fed slows down or pauses interest rate cuts, it will definitely impact global liquidity, which could have a negative effect on the price of Bitcoin, something to be mindful of.

Reference article: WeChat Official Account “MeiTouinvesting”