If these four things happen, U.S. stocks could plummet

Investors should not be too surprised when they see the stock market fall.

The U.S. stock market is very fragile at the moment, and there are several factors that could cause the stock market to fall sharply.

The first factor has to do with the number 4607 points.

This is the intraday high of the year set by the S&P 500 at the end of July, the index is up about 19% year-to-date and is currently just below 4600, and whenever it approaches the intraday high of 4607, sellers enter the index to push the index lower, and if sellers continue to enter around this level, it will put additional selling pressure on equities.

Stocks rose sharply as the U.S. economy had so far avoided an expected recession, leading to optimism that the economy and corporate profits could continue to grow. In addition, the Fed's rate hike cycle may be over, and the pressure on the stock market from rate hikes will disappear with it.

Fund managers buying stocks aggressively during stock market rallies are the second factor that can trigger a sell-off.

Fund managers now hold a net of about $800 billion in S&P 500 futures contracts, up from last year's low of around $200 billion, according to RBC data, and buying has since pushed stocks higher.

With current fund managers' holdings just below their highs of just over $1 trillion since 2006, these fund managers may now cash out by selling stocks, especially if market risk and their paper profits are realized.

Lori Calvasina, chief U.S. equity strategist at Royal Bank of Canada, said: "Investor sentiment is once again at an overly high level, which dampens our interest in U.S. equities in the near term. ”

Given the weakening volatility in the market, it is not surprising that investors' enthusiasm for the stock market has become too extreme. History tells us that

When volatility is as low as it is now, the stock market tends to fall sharply next.

The VIX Fear Index, which measures stock market volatility, has now fallen from a multi-month high of around 22 at the end of October 13, and when the index is at a high level, it indicates that investors' uncertainty about future earnings and how to value stocks is peaking, and when the index is at a lower level, investors are becoming more confident, often followed by higher stock market valuations. Any measure of economic and earnings risk could lead to a decline in the stock market, with Wells Fargo noting that the S&P 500's average return fell 6.9% in the six-month period through June of the new year as the VIX entered the new year below 14.

If the market's expectations for a Fed rate cut fail to materialize, the stock market will fall sharply.

The Fed funds futures market is currently pricing in a 47% probability of a Fed rate cut in March next year after inflation has eased sharply from last year's peak, however, inflation is still above the Fed's 2% target and the Fed may not be able to cut rates so quickly. If interest rates are cut in March, inflation will remain above target after demand is stimulated, and if that happens, the Fed will have more reasons to raise rates one or twice more.

Chris Harvey, equity strategist at Wells Fargo, said: "In the short term, the Fed is more inclined to slow down the pace of action, and cutting rates too soon will lead to higher inflation and undermine the Fed's credibility." ”

This is why the likelihood of a near-term rate cut will decrease, which will put pressure on the stock market. The Fed may already have some reasons not to cut rates, such as the sharper-than-expected job creation in November, and the Fed's inflation concerns are not so easily dispelled.

All of these factors can cause the stock market to fall, so investors should not be too surprised when they see the stock market falling.

Text | Jacob Sonamsien

Edit | Guo Liqun

Copyright Notice:

Original BarronsChina articles may not be reproduced without permission. See the December 9, 2023 article "A Strong Jobs Report Makes Big Rate Cuts Unlikely in 2024".

(The content of this article is for informational purposes only and does not constitute any form of investment and financial advice; the market is risky and investment should be cautious.) ）

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