Wu chaoming: its only a matter of time before us stocks enter the bear market!

category:Finance
 Wu chaoming: its only a matter of time before us stocks enter the bear market!


Author Wu chaoming and Hu Wenyan (Caixin Institute of International Economics)

Wu chaoming

Key points:

Viewpoint 1: in the US macroeconomic analysis framework, income determines consumption, consumption dominates the economy, income is the leading indicator of US stocks, and employment is a lagging indicator. The historical practice of the United States since 1965 shows that the decline of the real unit time income growth rate indicates that the U.S. stock market will adjust significantly or fall into a bear market, which provides a verification for the logic in the analysis framework.

Viewpoint 2: Based on the logic and perspective of macro analysis framework, it is only a matter of time before us stocks enter the bear market in the future, because the growth rate of actual unit time income of leading indicators will inevitably enter a period of obvious decline. Firstly, during the public health crisis, the financial debt burden of the United States was significantly heavier than that of the subprime mortgage crisis, the high growth of personal transfer payment income was unsustainable, and the abnormal increase of real unit time income growth was only a temporary phenomenon. Second, the unemployment of service industry is the most serious during the epidemic period. The decrease of labor supply leads to the increase of unit time income of service industry instead of falling down. After the epidemic situation improves, the increase of supply will reduce the growth rate of service industry income. Third, the inflation level in the United States will gradually return to the target value of 2%, which will lower the growth rate of real income.

Viewpoint 3: from the perspective of valuation, the falling risk of US stocks is greater than the rising probability. First, from the perspective of historical comparison, multi index early-warning US stocks are in a state of high valuation. For example, the S & P 500 P / E ratio, stock oil ratio and other valuation indicators have been in the top 5% percentile in history, and there is limited room for further improvement. Second, the head of the U.S. stock market is crowded, and the pressure of valuation adjustment is more prominent. At present, the total market value of faamng, a six leading technology company in the US stock market, accounts for 23% of the S & P 500, which is significantly higher than the level in other stages of history. Third, the driving force behind the rise in US stock valuations is weakening. For example, affected by the increasingly narrow fiscal and monetary space in the United States and the rising market inflation expectations, the downward momentum of US bond interest rates is weakening, and the outbreak of the second overseas epidemic will also suppress the market risk preference, which is not conducive to the rise of valuation.

Text:

Since the subprime mortgage crisis occurred in the United States in 2007, the S & P 500 index of U.S. stocks has bottomed at 666.79 on March 6, 2009, and has risen all the way since then, reaching a peak of 3588.11 by September 2020, with a growth rate of more than four times. This round of rise has lasted for more than 10 years. There are many studies on whether to face substantial adjustment in the future by major institutions, academic circles and other relevant departments at home and abroad, with different results and great controversy. Different from most market research and analysis, this report analyzes US stocks from two perspectives: one is based on the US macroeconomic analysis framework, and proposes leading indicators for US stock adjustment, which is verified by historical data of the United States, on this basis, it predicts the direction of US stock market; the other is to analyze the internal adjustment pressure of US stocks from the valuation method commonly used in the market.

1u3001 Based on the macroeconomic framework: income is the leading indicator of US stocks

uff081uff09 Us macroeconomic analysis framework: income determines consumption, consumption dominates the economy, and income is the leading indicator of US stocks

What are the variables that determine individual consumption expenditure in the United States? Therefore, starting from the core determinants of the economic cycle, we establish an analysis framework of the U.S. macroeconomic cycle (see Figure 2)? The end of the dollar asset feast? u300buff09u3002 From a logical point of view, personal income (mainly wages and salaries) is the main driving force of consumption expenditure, and credit and borrowing can also drive consumption expenditure; consumption expenditure is the key determinant of cyclical fluctuation of industrial production, and the growth and decline of industrial (Manufacturing) production is an important force to drive the change of capital expenditure (i.e. plant and equipment expenditure); consumption expenditure Industrial production and services as well as capital expenditure represent the core variables of enterprise profit, so the enterprise profit mainly depends on consumption expenditure; and the change of enterprise profit will be reflected directly by the rise and fall of stock market, and at the same time, it also determines the change of employment.

uff082uff09 Us historical experience: revenue is the leading indicator of US stocks

We choose the unit time income of American non-agricultural enterprise employees and exclude the influence of inflation to get the actual unit time income; while the US stock market selects the S & P 500 index which has a wider sampling range and stronger representativeness. Due to the availability of data, this paper analyzes the relationship between income and US stocks since January 1965.

1. Real unit time income is an effective leading indicator of stock market decline

During 1965-1985, the S & P 500 experienced six bear markets with a decline of more than or close to 20%, namely, April October 1966, December 1968 May 1970, January 1973 October 1974, January 1977 March 1978, December 1980 August 1982, October 1983 July 1984. Before the occurrence of the five bear markets, they all experienced a decline in the growth rate of real unit time income. The length of the leading time of the latter ranged from 1 to 4 months, with the exception of 1980-1982 (see Figure 3). In addition, there have been three times (1978-1980, 1982, 1986) in the 20-year period when the growth rate of income decreased, but the US stock market rose on the contrary. Does this mean that the real income growth rate per unit time is not a reliable leading indicator of the stock market? The answer is of course No.

From 1978 to 1980, the growth rate of real income per unit time decreased, but the stock market rose on the contrary. The main reason was that the prices of energy, metals and other products rose sharply from 1978 to 1980. For example, the energy price index rose from 5.1% to 47.1%. Driven by this, the inflation level in the United States increased rapidly from 6% to nearly 12% (see Figure 4). The stock prices of inflation beneficiary industries in the stock market rose sharply and pushed up But non inflation stocks are still in a bear market. From 1981 to 1982, the prices of energy, metal and other products dropped sharply, which led to the rapid decline of inflation level. Inflation beneficiary stocks adjusted sharply under the double pressure of overvalued value and performance pressure, resulting in the stock market falling into a bear market.

In 1982 and 1986, the growth rate of real unit time income decreased and the US stock market went up in reverse. The reason is that President Reagans tax cut plan caused the abnormality. President Reagans tax reduction plan reduced the progressive tax rate of personal income from 70% to 28%, the tax rate of capital gains such as interest and dividends from 28% to 20%, and the corporate income tax rate from 46% to 34%. The essence of tax reduction is that the government transfers part of the fiscal revenue to individuals and enterprises. Therefore, although the growth rate of residents income has not increased, the part of unit income used for consumption has increased. Therefore, in the history of the United States, after the introduction of tax cuts, there are generally phenomena that the growth rate of consumption expenditure and income deviates from the development, and the stock market rises. As tax cuts reduce the cost of enterprise investment, increase investment expenditure and corporate profits, but also promote the rise of the stock market.

2. 1986-2006: real unit time income is an effective leading indicator of stock market decline

3. 2006-2020: real unit time income is an effective leading indicator of stock market decline

During the period of 2006-2020, the US stock market experienced six bear markets, of which five bear markets appeared, and the leading role of income growth index was obvious (see Figure 7). With the emergence of the bear market in 2018, the growth rate of real unit time income did not decline. The main reason is related to the upgrading of Sino US trade friction, which leads to the markets worry about economic growth, the mood turns worse, and the risk preference decreases.

During the period of 2006-2020, there were two crises of different nature in the United States. Novel coronavirus pneumonia was the first sub prime mortgage crisis in 2007, and the other is the new crown pneumonia outbreak since the beginning of 2020. The occurrence of the two crises, the actual unit time income growth rate did not decline but increased, which seems to be against the common sense, but in fact is not contradictory. First, during the crisis, the monetary and fiscal policies of the United States took positive measures, and the intensity of transfer payment increased significantly. The growth rate of personal transfer payment income, including social security, medical insurance, Medicaid, unemployment insurance and veterans welfare, increased rapidly, which led to the increase of personal income (see Figure 8). However, due to the weak sustainability of transfer payment, the final income increased Speed will return to economic fundamentals; second, after the crisis, the inflation level will decline significantly (see Figure 9), leading to the increase of real income. However, with the recovery of the economy, the inflation level will tend to increase, and the growth rate of real income will also decrease. Therefore, the increase of real unit time income growth during the crisis is a temporary phenomenon.

2u3001 Its only a matter of time before us stocks enter a bear market

The practice of the subprime mortgage crisis in 2007 shows that under the influence of policy stimulus and deflation, the growth rate of real unit time income tends to decline after a short period of improvement, and then the stock market entered a bear market twice in 2010 and 2011 (see Figure 7). Compared with the subprime mortgage crisis, the impact of the public health crisis in 2020 on the growth rate of unit time income may be greater, the high growth rate is more difficult to sustain, and the future decline is inevitable.

Firstly, the growth rate of personal transfer payment income during the public health crisis was significantly higher than that of the subprime mortgage crisis, but the fiscal debt burden of the United States was significantly heavier than that of the subprime crisis, and the high growth of transfer income was unsustainable. For example, the US federal budget deficit in 2008 was US $459 billion, and the actual deficit in that year was $680.5 billion, which exceeded 48% of the budget level. However, the budget deficit in 2020 was $1083 billion, but the actual deficit from January to August this year was 2650.8 billion, which was 145% of the budget level (see Figure 10). With the introduction of the new fiscal stimulus policy, the deficit will reach a new high. Therefore, if the United States continues to implement fiscal stimulus, it can barely maintain income growth in the short term. However, according to the historical experience of 2008-2009, it is inevitable that the growth rate of income will return to the control of economic fundamentals, and the decline is inevitable (see Figure 11).

Second, the unit time income of service industry is difficult to maintain high growth. From the perspective of industry employment data, the service industry accounts for the highest proportion of non-agricultural employment in the United States, which has been maintained at about 86% since 2019. Therefore, the unit time income of service industry determines the unit time income level of the whole non-agricultural employment. However, under the impact of the public health crisis in 2020, there is an abnormal phenomenon, that is, the growth rate of unit time income in the service industry has increased significantly, rather than decreased, which has led to a leap in the growth rate of hourly wage per unit (see Figure 12). The reason is that, under the impact of the epidemic, the labor aggregation service industry has been hit the most, and the unemployment phenomenon is the most serious (see Figure 13). The decrease of employment leads to the increase of wages and unit hourly wages instead of decreasing. However, this phenomenon is unique to the epidemic health crisis and did not appear in the 2007 subprime mortgage crisis. Therefore, as long as the epidemic situation improves, especially after the emergence of vaccines, the number of employment in the service industry will gradually return to normal, and the hourly salary of the service industry will also drop to the normal level, thus driving down the growth rate of unit time income.

Third, the inflation level in the United States will gradually return to the target value of 2%. Under the impact of the epidemic, the demand in the United States has declined, and the inflation level has also experienced a rapid decline. For example, the price index of personal consumption expenditure (PCE) dropped rapidly from 1.9% in January 2020 to 0.5% in April (the outbreak peak in the first half of the year), and then gradually recovered to 1.0% in July. It is expected that the future inflation level will gradually return to 2% or even higher under the combined effect of the Federal Reserves loose monetary policy stimulus and the improvement of the epidemic situation. After excluding inflation factors, the real growth rate of unit time income will be reduced.

At present, although the second wave of the global epidemic is coming, the most serious stage of the impact of the epidemic on the global economy has probably passed on the basis of early prevention and control experience and the vaccine is expected to be launched. The spread of the epidemic and its delay in ending will slow down the global economic recovery, extend the time for the economy to recover to the level before the epidemic, and extend the exit time of the loose monetary and fiscal policy. However, the epidemic situation will be overcome sooner or later, which will not change the trend of economic recovery. Therefore, the growth rate of transfer payment income and unit time income of service industry will decrease, and the inflation level will rise. Under the joint action of three factors, the growth rate of actual unit time income in the United States will experience an obvious decline period in the future.

uff082uff09 Its only a matter of time before us stocks enter the bear market

According to the U.S. macroeconomic analysis framework, and the historical experience that the decline of real unit time income growth rate leads the adjustment of US stock market (the increase of income growth rate is not the leading indicator of US stock market), the evolution of the US stock market in the future will follow the following logic: the growth rate of real unit time income will decline, and the growth rate of consumption expenditure accounting for nearly 70% of US GDP will decrease, which will drive industrial production and capital expenditure When the real GDP growth rate will decrease, corporate profits will worsen, and the US stock market will adjust. Therefore, it is only a matter of time before the US stock market will experience a bear market under the prospect that the real unit time income growth rate will inevitably experience a decline period in the future.

3u3001 Valuation perspective: falling risk is greater than rising probability

According to the classical DDM stock pricing model, the stock price depends on three factors: profit, risk-free interest rate and risk preference. Therefore, in addition to the profit factors analyzed above, the valuation which can comprehensively reflect the risk-free interest rate and risk preference is also an important factor affecting US stocks. According to our statistics, since 1991, earnings and valuation have made different contributions to US stocks. Generally, the impact of valuation should not be underestimated. Especially when valuation deviates from earnings, the rise and fall of stock indexes sometimes choose to stand on the same side as valuation, such as 1994, 2000, 2002 and 2018 (see Figure 14).

First, from the perspective of historical comparison, the multi index early warning that US stocks are in a state of high valuation. This paper selects nine classic financial indicators to conduct a comprehensive physical examination of US stocks (see Table 1). The results show that: first, two of the valuation indicators, such as price earnings ratio, market sales ratio, price to net ratio, and price to cash ratio, which reflect the deviation degree between the price of American shares and the profit growth space, are in the top 5% range in history, and the lowest market rate is also in the top 23% level in history, indicating that the above indicators have further increased The space is limited. Second, indicators such as the ratio of stock to gold, the ratio of stock to oil, and the rate of return to ten-year Treasury bonds, which reflect the cost performance of US stocks and other major categories of assets, are in the top 30%, 5% and 1% percentiles of history respectively. It also shows that the probability of US stocks to obtain excess returns is low and less attractive than other assets. Third, in terms of the proportion of the total market value of US stocks in GDP, the value is at the highest level in history, reaching 239.4%, nearly 100% higher than the bull market peak in 2007, which means that the current US stock market has seriously deviated from the fundamentals, and the future valuation convergence pressure is very large.

Second, the head of the U.S. stock race track congestion, valuation adjustment pressure is more prominent. In terms of the distribution of all U.S. stock valuations, high and low valuations are extremely divergent. In 2020, the proportion of individual stocks with overvalued value will increase significantly, and the stability of valuation structure will be worrying. For example, as of September 23, the number of Pb (i.e. price to book ratio = share price / net assets per share) of US stocks has reached 6.1%, which is more than 3 times of that in 2010 and 2019 (see Figure 15). From the market capitalization ratio of 6 head companies in S & P 500, the situation of excessive concentration of US stocks is even more prominent. For example, as of September 23, 2020, the total market capitalization of the 6 head technology companies of the US stock market accounted for about 23% of the total price of the S & P 500, which was more than 5 percentage points higher than that of the beginning of the year, which is nearly 7 percentage points higher than that of the DOTCOM market value during the Internet bubble. The number of overvalued U.S. stocks accounts for a large proportion, and the race track of the top stocks is crowded, which means that the vulnerability of the market microstructure is increased. Once the factors that promote the rise of valuation in the early stage are weakened, the pressure on the group plate to drive all the US stock valuations will be very large.

Third, the driving force behind the rise in US stock valuations is weakening. According to the DDM model, the rise of valuation is mainly driven by the decrease of risk-free interest rate or the rise of risk preference. For example, since the outbreak of the epidemic, the yield center of 10-year Treasury bonds has dropped by more than 100bp, which is the main reason for the rise of US stock valuation. However, with the increasingly narrow fiscal and monetary space in the United States, the rising market inflation expectations, and the continued decline of US bond interest rates have significantly weakened. At the same time, the rise of market risk preference will continue to be restricted by the outbreak of the second overseas epidemic. Specifically, first, the US federal funds target interest rate has dropped to the historical low of 0-0.25% (see Figure 16), and the Federal Reserve has repeatedly made it clear that it will not implement zero interest rate, which means that there is little room for US interest rate reduction to drive down the market interest rate. Second, the scale expansion of the Federal Reserve in this round is more than twice that during the financial crisis in 2008. In addition, the recent adjustment of the Federal Reserves monetary policy framework, and the target value of short-term inflation exceeding 2% will not raise interest rates, which may push up inflation expectations in the market and cause interest rates to rise. In the latest meeting minutes in September, the Federal Reserve has comprehensively raised the inflation level of personal consumption expenditure (PCE) in the United States in 2020, 2021 and 2022. Since June, the core PCE of the United States has also shown signs of rising (see Figure 17), pointing to the rising inflation in the United States or inevitable, and the increasing risk of US bond interest rate upward.

4u3001 Conclusion: it is only a matter of time before us stocks enter a bear market

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