The market has recently experienced a downturn, largely due to the Federal Reserve signaling a more hawkish stance and potentially pausing interest rate cuts, contradicting prior market expectations.
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Okay, some of you may remember my video
from September 22nd where I talked about
the reasons why I'll stop buying more
into the market. The points which I
mentioned are number one, cutting the
rates despite high inflation and low
unemployment is weird and number two
forward price to earnings of big tax are
at 30 times which is relatively high.
Number three, the market is pricing in
at least two more rate cuts which is too
optimistic. Number four, I was not sure
whether tariff impact will be a one-off.
Number five, weaker dollar may push the
inflation higher. Okay, so in recent
weeks, the market is showing a weaker
movement with NASDAQ falling by around 7
to 8% versus the all-time highs. The
reason the market is showing a downfall
is because of all the points I mentioned
in my previous video. So, it's not
really a surprise for us, but
nonetheless, let's go through each of
them and refresh our views.
Okay, so on the rate cuts despite high
inflation and low unemployment.
Okay, so the reason this was weird was
simple. Cutting the rates should
generally happen when the situation is
the opposite, i.e. inflation is low and
unemployment is high. As we all saw in
my previous videos, the reason the Fed
was still cutting the rates was because
number one, there was a strong push from
the current administration to cut the
rates. And number two, they were viewing
the low unemployment as a curious kind
of balance which may break. Number
three, the Treasury and the Fed
eventually came to an agreement that the
tariffs impact on inflation is a
one-off. Okay, so while the Fed was
somewhat showing a gesture of cutting
the rates multiple times this year, as
we reviewed in the previous video, they
have suddenly become quite hawkish. Now,
what are some new key events that
happened in between?
So, as I said previously, the whole
thing started at the October 29th FOMC.
Paul said that a further reduction to
the policy rate at the December meeting
is not a foregone conclusion as they
need to really see whether there really
are downside risks to the labor market.
Okay. But after PAL's conference, the
other FOMC members joined PL and started
expressing their thoughts about the
labor market and inflation.
On November 12th, Raphael Bostik, the
CEO of the Atlanta Fed, said, "I favor
keeping the funds rate steady until we
see clear evidence that inflation is
again moving meaningfully towards its 2% target."
target."
On November 13th, Neil Cash Carry, the
CEO of the Minneapolis Fed, said the
anecdotal evidence and the data implied
underlying resilience in economic
activity that argued for a pause to cut
the rates.
On November 14th, Lori Logan, the CEO of
the Dallas Fed, said it would be hard to
support another rate cut unless we were
to get convincing evidence that
inflation is really coming down. On
November 19th, the FOMC minute noted
that participants expressed strongly
deferring views over whether to cut
interest rates again in December. Okay,
so this month there were multiple signs
of the Fed not cutting the rates in
December, which is a huge impact on the
market's valuation. As I say all the
time, the interest rate is the discount
rate of the future cash flows of the
companies. So if the rate is maintained
at a high level, the future cash flow of
the companies will also shrink leading
to a lower valuation which will
eventually lead to a fall in the stock market.
market.
Okay. So now why is the Fed suddenly
changing their stance on the interest
rate cut?
So there seems to be a few reasons. A
the government shutdown, halted and
compromised the release of key data such
as CPI, PCE and the full job report.
Paul explicitly said that further cuts
weren't guaranteed given the lack of
government data. B there were quite a
few Fed officials who were against the
rate cuts already. In previous months,
there were Fed officials like Steven
Myin who voiced his opinion a lot more
loudly. But with no data to back his
argument, I think other officials are
now being more vocal.
See, the data does suggest that
fundamentals of the economy is still not
suitable for a rate cut. I've been
saying this as well, but a low
unemployment coupled with high inflation
is generally not a good environment to
cut the rates. Okay, so in short, how I
think about this is that the Fed
officials were rather passive in being
vocal about their opinions as there are
two are humans and will inevitably
become cautious about what to say.
Especially looking at Kougler being
replaced with Myin. I mean, not a lot of
people want to lose their jobs, right?
It's just the human nature. So, I don't
think they've been too vocal about it.
But at this moment when number one,
there's no data to take any actions and
number two, Trump's approval rating is
falling sharply. I think they're taking
their chances now. In other words,
they're being more frank about what they
think. Okay. Anyways, I think that's
what's happening. Now, let's move on to
the second point.
Number two, forward price to earnings of
big tax are at 30 times, which is
relatively high.
Okay, so I've been saying that this was
the main reason why I would not buy more
into the market. To be honest, I'm
actually happy to see the market going
down a bit as it may give us more
opportunities to buy more into the
market. I mean, I did invest a sizable
amount of capital from early April, but
I would be happy to buy more if
circumstances allow. Based on what I see
today, the big tech valuation has come
down from around 31 times to around 29
times, which is a more fair value. Now,
as you may have seen, the big techs are
recording great earnings with Nvidia
recording a record revenue with over 60%
growth on a Y basis. I believe this
trend will continue for some time. And
if the share price of big tax falls
further from here, I'll buy more into
the market. By the way, I understand
there are quite a lot of debates on
whether AI is a bubble and I plan to
cover this through a separate video.
Number three, the market is pricing in
at least two more rate cuts which is too optimistic.
optimistic.
So I think this point is somewhat
related to the first point. So I keep it
simple. In short, the market grows
feeding on optimism. However, when
things get too optimistic, any
underperformance may act as a negative
trigger which may drag the market down.
As I warned previously, too much
optimism is not healthy for the market
and needs to be corrected fast or the
market may face a catastrophic crash.
Number four, I was not sure whether
tariff impact will be a one-off. Okay,
so this is still a point to be proved.
We'll need to wait for a few more
quarters given the recent government
shutdowns with lack of data. This issue
is still a risk given increasing tariff
on one item may lead to chain effects
across other items as well. I mentioned
in my previous video that increasing the
tariff on washing machines can increase
the price of dryers as well. So, we'll
still need to see and be careful with
this point.
Number five, weaker dollar may push the
inflation higher. Now, based on the most
recent dollar index, the dollar is
trading at around 100, which is somewhat
higher than the previous month. Although
near-term trend needs to be monitored, I
think tariff is still a bigger threat to
the inflation. Okay, so based on what we
reviewed, here's a summary of my view.
Number one, government shutdown, data
blackout, and falling approval rating of
Trump led to some chaos at the Fed.
We'll need to monitor how things span
out, but for now, my prediction is a
December rate cut probability is
probably less than 50%. And B, however,
chances of January rate cut is around
50% while March rate cut is above 50%.
While things are uncertain, as I say all
the time, political uncertainties
generally go away quite quickly. So,
I'll stick to my current position.
Number two, valuation adjustment for big
tax is not a bad thing. It may give us
some more windows to buy into the market
while keeping the existing positions,
which should be deeply in the money if
you had been purchasing the shares from
early April. Just for your information,
my existing positions are still
recording a 50% plus return, which
mostly comprises of big tax.
Number three, if the stock market falls
further, I think there are some remote
chances of the current administration
taking some radical actions such as
steering the Fed to start another round
of QE. I actually think this is a
plausible scenario if the chairman of
the Fed is replaced by someone else.
Also, as I explained in my previous
video, repo and reverse repo issues with
limited liquidity may act as a good
ground for the Treasury to push the Fed
towards that direction.
Okay, so I've been saying this for over
a month now, but my strategy still holds
the same. I'll not buy more into the
market just yet, but I'll hold on to my
existing positions. I hope you enjoyed
the video and I'll be back with more
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