"US Stocks Plunge: 800-Point Drop"

Last night, the U.S. stock market experienced another significant decline, with the Dow Jones Industrial Average closing down nearly 800 points. The Nasdaq suffered the most, falling by 3.6% yesterday, and the S&P 500 index also dropped by nearly 3%.

The European stock market, which opened yesterday afternoon, also saw a sharp decline at the start. The German DAX index fell by more than 4% at its lowest point. However, as the U.S. stock market was about to open, the European stock market had gradually narrowed its losses.

Under these circumstances, the U.S. stock market still saw a substantial decline. Will the U.S. stock market now face a significant downturn similar to that of 2008?

01, Review of the Decline

To analyze the future trend, let's first examine the process and reasons behind the recent decline in the U.S. stock market.

From last September until the end of November, the Nasdaq index was slowly climbing amidst fluctuations. However, starting from late November, the Nasdaq experienced several weeks of intense volatility, initially triggered by the confirmation of the Omicron variant. The red square in the chart above represents this period.

But the sentiment during this period gradually eased in the latter half of December, so in the last two weeks of December, the Nasdaq index returned to the upper part of the trading range.

However, unexpectedly, entering January, due to high inflation data and concerns about the interest rate hikes that the Federal Reserve might implement, the Nasdaq index began to decline continuously from early January 2022, only starting to recover after the Federal Reserve meeting in late January. And in early February, there was a small uptick.

But in late February, as the situation in Europe became increasingly tense, the U.S. stock market once again experienced a decline.

02, Reasons for the DeclineLooking back at the recent trends in the U.S. stock market, several factors influencing the U.S. economy and stock market have been clearly revealed. It is believed that these factors will continue to exist in the foreseeable future.

The first factor is the pandemic. This is mainly reflected in the impact around late November when the Omicron variant emerged.

The second factor is inflation and interest rate hikes, including the decline that began in January and the ongoing drop from March to the present, which is still influenced by inflation and interest rate hikes.

Of course, there is a third factor, which is the short-term impact of geopolitical conflicts in Europe. However, I believe that this factor will not last very long.

In recent days, the U.S. stock market has seen another significant decline. Many people believe it is related to the conflict in Europe, or even whether the U.S. will intervene militarily to a greater extent. In fact, the real impact is not there.

The current stock market decline is the result of two factors叠加.

On one hand, there is the Federal Reserve meeting in March.

Although the market generally predicts a 25 basis point interest rate hike this time, it cannot be ruled out that there will be black swan events at the Federal Reserve meeting. There are currently two possible black swan events. The first is that the interest rate hike is greater than predicted. If the market predicts a 25 basis point hike, and the actual hike turns out to be 50 basis points, the market will definitely be greatly affected.

The other black swan event is that the Federal Reserve may announce a plan to reduce its balance sheet. Before this, the market predicted that the reduction of the balance sheet would only be mentioned in the middle and later stages of the interest rate hike cycle. However, it now seems that the Federal Reserve may also start reducing the balance sheet at the same time as raising interest rates.

On the other hand, the impact of the European conflict is also a factor. This is not an impact from a military perspective, but from an economic perspective.This is directly reflected in the fact that before the true outbreak of this round of conflicts in Europe, the price of oil slowly rose above $90. Under such circumstances, inflation in the United States has already reached 7.5%.

However, in just the past two weeks, the price of oil has risen rapidly, and yesterday the price of oil has exceeded $130. The rapid rise in energy prices will further push up the U.S. CPI, and it is very likely that the CPI data for the next month will reach 9%.

The inflation data has already had a significant impact on the U.S. stock market. If the inflation data continues to break through upwards in a short period of time, then for the Federal Reserve, for the U.S. stock market, it is a very contradictory dilemma.

Everyone knows that using interest rate hikes to curb inflation is a double-edged sword, which may suppress inflation while causing economic growth to falter.

The rise in energy prices itself increases the production costs of enterprises. After the interest rate hike, it further increases the financial costs of enterprises. The increase in these costs will inevitably greatly reduce profits. Without the support of profits, the production and investment of enterprises lose enthusiasm, and the economy may turn downward. All of these will be reflected in advance in the stock market. Therefore, the decline in U.S. stocks during this period is not only influenced by the European situation, but more importantly, it comes from the impact behind the economy.

03, the possibility of stopping the decline

At present, it seems that the U.S. stock market still needs to wait to stop falling.

Firstly, after the U.S. stock market has fallen for a long time and a large range, the possibility of a large decline is not great, and it is likely that a signal to stop falling will appear in the near future.

This requires waiting for the latest interest rate decision of the Federal Reserve meeting, and also waiting for the energy price to fall back (after exceeding 130 yesterday, it has already fallen back). This point is more dependent on the European situation being eased.

But no matter what, the current decline is also an opportunity for investors. What we need is just enough bullets and more patience to buy in batches slowly.