Global liquidity is shrinking, and the external environment is increasingly unfavorable to highly valued assets. Under the existing funds, the "28-28 differentiation" of US stocks may intensify, and further gather with core assets with certain performance and strong growth. The final result may be a retaliatory rise first, and then the bubble bursts.
The only reason why the bubble burst is that the valuation is too expensive and no special catalyst is needed. In the case of high valuation, any reason may be the trigger for the callback, whether it is negative news, financial scandals, political events or the emergence of big sales.
1. The pressure of rising interest rates
Although inflation did not meet expectations, the inflation of asset prices also worried the Fed. The Federal Reserve began to raise interest rates from 20 15 to 12, which not only put pressure on the stock market valuation, but also increased the interest expenses of listed companies and reduced the repurchase efforts.
High leverage intensifies the positive feedback effect of the whole financial system to some extent. Once the liquidity environment deteriorates, the profitability and cash flow generating ability of enterprises decline, and enterprises cannot continue to borrow and repurchase. High leverage also brings additional burden to the debt cost, which makes earnings per share suffer a double blow from numerator and denominator. From September 20 16 to September 20 17, the repurchase rate of Standard & Poor's 500 companies decreased by 5.3%.
Looking back, 1987, 2000 and 2007, the three sharp declines in US stocks all occurred in the context of the Fed's interest rate hike and liquidity contraction. During the three sharp falls in the US stock market, the Federal Reserve raised interest rates by 2 17bp on average. Raising interest rates will inevitably increase the interest cost of enterprises and reduce the share repurchase of enterprises, thus putting pressure on earnings per share.
The current US stock market is the eighth bull market. Compared with the previous three stock market crashes, it is more similar to the bull market before 1987. The liquidity premium has been declining for a long time, but it is facing a reversal. The increase in the proportion of passive investment drives the valuation of heavyweights. In the past three times, the Federal Reserve raised interest rates until the US stock market crashed, and the interest rate of 10-year US bonds rose on average 150bp.
Based on this historical experience, the tail risk of the bursting of the US stock valuation bubble increased sharply after the interest rate of US bonds 10 rose 120- 170bp in this interest rate hike cycle.
Table 2: Statistics of interest rate changes in previous interest rate hikes
Source: WIND, TF Securities Research Institute.
2. The external liquidity environment of US stocks is changing.
The attitude of overseas funds towards US debt will also affect the trend of US stocks. The yield of 10-year treasury bonds is higher than the S&P dividend, which means that for investors who pursue cash income (debt interest or dividend), low-risk bonds are more attractive than the dividends of high-risk stocks, and funds will flow from stocks to their bond positions. From the perspective of capital flow, overseas funds stopped buying US bonds on 15. From the end of 10, bond interest exceeded dividends for three months, and S&P also went down all the way, dropping sharply on 16.
20 17 September, the Federal Reserve reduced its balance sheet, and the assets it no longer purchased were mainly 10-year US debt. Compared with June, 15, emerging market stocks, developed European and emerging market bond markets will continue to divert funds originally flowing to the US bond market. One week after the tax reform was passed (12.18-12.22), there was the largest weekly net outflow from the US stock market since August of 20 14, reaching 178 billion US dollars, and the US bond market outflow was 4.42 billion US dollars, with funds flowing to Europe.
Figure 16: 10-year treasury bond interest rate VS dividend yield
Source: WIND, TF Securities Research Institute.
3. Leading indicators peaked
In August last year, US stocks and high-yield bonds both pulled back. Standard & Poor's continued to rise after a small retracement, while high-yield bonds (HYG) peaked and fell back. In late June, 10, high-yield bonds collapsed, the spread of high-yield bonds widened, and the maturity curve of US bonds was further flattened.
Figure 17: The US stock market crashed four months after the peak of high-yield bonds.
Source: Bloomberg, TF Securities Research Institute.
Robots occupy the whole reception desk.
Minsky believes that long-term market stability will encourage investors to take more risks, and too many risks will inevitably lead to instability. When these risky positions are finally closed, it may lead to a sudden tragic decline in the market.
If we put it in a similar situation today, we can say that the current extremely low volatility and risk premium have no predictive effect on future risks, because the risk control indicator VAR widely used by major funds today is based on retrospective data rather than forward-looking careful thinking. Perhaps active investment can also include some subjective assessment of risks. However, passive ETF, SmartBeta and active quantification based on a series of indicators such as volatility are popular, and robots occupy the whole reception. The negative feedback mechanism of ETF and VAR will be like the programmatic transaction of that year. As soon as the music stops, they will trample on each other in the process of squeezing to the exit.
Figure 18: Standard & Poor's 500 VIX Index
Source: WIND, TF Securities Research Institute.
5. Low cash position of institutional investors
Monetary fund assets only account for 20% of the fund industry, hitting a new low of nearly 30 years. A large amount of funds poured into stock mutual funds, and their cash positions accounted for less than 4%. A survey of all institutional investors in June last year showed that the overall cash position was only 2.25%. Low cash positions mean that the funds that can flow into the stock market in the future are almost exhausted.
Figure 19: The proportion of cash and money fund assets of mutual funds in the fund industry is low.
Source: Bloomberg, TF Securities Research Institute.
Figure 20: Proportion of cash held by institutional investors
Source: Bloomberg, TF Securities Research Institute.
The proportion of leveraged investors has increased. The chart below shows the CFTC statistics of asset management and leveraged funds in future positions. Since last year, the purchase of stock futures has increased steadily. In the past two years, these positions have grown steadily and rapidly, with an average annual increase of about $50 billion.
Figure 2 1: CFTC data: stock index futures of leveraged funds and asset management companies (including S&; Dow Jones, Nasdaq) positions
Source: CFTC, Bloomberg, JPMorgan Chase, TF Securities Research Institute.
6. US stocks have become more sensitive.
Figure 23: Low volatility cannot hide the fact that US stocks are emotionally sensitive. The impact of exceeding expectations on the stock price is only 1/3 of the five-year average.
Source: TF Securities Research Institute FactSet.
Judging from the reaction of Q3 US stock price to performance exceeding expectations, the price jump is only 0.4%, which is 1/3 of the five-year average. Investors' expectations for the performance of US stocks have been largely integrated into the current high valuation, and there is limited room for improvement. The reversal of performance is likely to cause a sharp decline in US stocks ~