US Inflation at 7.5%, Nasdaq Down 700 Points in 2 Days, How Long Will A-Shares Fall?

Currently, both stock investors and fund investors are discussing one thing the most: how long will A-shares continue to fall, and when will they start to rise?

If the market is expected to continue falling, should one sell? If the market begins to rise, should one start to build an initial position, yet worry about whether they might be catching a falling knife. What should one do?

01, Overseas Stock Market Situation

When discussing whether A-shares will continue to fall, one factor that must be considered is the trend of the U.S. stock market.

The decline in overseas stock markets in January was mainly due to the Federal Reserve meeting in the latter half of January. Before the meeting, there was a lot of uncertainty about whether the Federal Reserve would raise interest rates and by how much.

Now, it seems that the situation is somewhat similar. In the past two days, the U.S. CPI has been announced, with the latest data reaching 7.5%. There is still some time before the March meeting, and people are starting to worry about whether there will be an emergency rate hike or whether the March meeting will increase by 50 basis points.

However, after the continuous rapid decline in January, whether it's inflation data or expectations for the Federal Reserve's interest rate hikes, the market has already digested these factors quite well. Before the beginning of March, the likelihood of a significant decline in overseas stock markets is not high.

It is believed that for the foreseeable future, the main influencing factor on the trend of A-shares will not come from overseas stock markets, but more from within itself.

This has already been reflected in the trend of the Hang Seng Index in Hong Kong.

The Hong Kong stock market was at a low point in December last year, but it did not fall in January this year; instead, it rose. It only fell a bit around the Federal Reserve meeting and began to rise again in late January and early February. Although there have been some fluctuations in recent days, overall, it is still on the rise.The Hong Kong stock market, which performed poorly throughout 2021, has already begun to rebound.

02, Domestic Economic Data

Since the main influencing factor for future A-shares is not the overseas stock market, we need to look at the impact of the domestic economy.

In fact, the current domestic economic data is not very good, unlike the obvious rebound in the US economy.

China's economy began to rebound in the second half of 2020, and now there is a significant risk of an afternoon slump. Therefore, many people, starting from this perspective, believe that if the economy is not good, the stock market cannot improve.

However, everyone should pay attention: it's not that a good economy will lead to a good stock market, capital is the key.

For example, after the pandemic occurred in 2020, the currency was relatively loose, so the stock market or fund returns in 2020 performed well.

The current situation is that the latest data released by the central bank shows that M2 has reached 9.8, which is higher than the whole of last year, and it may further increase in the future, returning to above 10.

Looking back over the past few years, you will find that the correlation between M2 and the stock market is very strong.

In 2017, M2 was above 10 at the beginning of the year, and it slowly dropped to the 9-10 range in the second half of the year. Throughout 2017, it was basically above 9, and the market was characterized by a structural trend. Although the CSI 300 Index rose by 20%, the average return rate of funds was only 10%.The main increase this year was in value blue-chip stocks. This is very similar to 2021.

Entering 2018, M2 became more than 8, and the increase in money was not very good. By the end of the year, the CSI 300 Index fell by 25%. This is a clear example of insufficient funds leading to a stock market decline.

In 2019, the stock market was slightly better, but more of it was a rebound from the big drop in 2018, not driven by an increase in funds.

In 2020, due to the pandemic, the economy was almost at a standstill in the first half of the year. For many industries, regions, or specific companies and individuals, there was a halt in work and production. Under such circumstances, the economy was definitely very bleak. Normally, if the economy is not good, the stock market should not be good. But the reality was exactly the opposite.

At the beginning of 2020, the country made a decision very quickly, with three reserve requirement ratio cuts, one comprehensive and two targeted. So from March 2020 to the beginning of 2021, M2 was above 10.

Driven by a large amount of funds, the fund returns in 2020 were the best since 2016. The biggest feature of 2020 was the very high increase in money.

Why was 2021 relatively poor? We need to see a turning point: starting from March 2021, the money growth rate dropped back to 8. There was one reserve requirement ratio cut in the middle of the year, but it was still not enough. Then there was a cut in December, and the M2 in December and January of this year finally stabilized above 9. I predict that it may exceed 10, so I think this year is very likely to be similar to 2020, at least better than the stock market in 2021, which relied on existing funds for competition.

In addition to the optimistic data of money growth, let's also look at the drawdown data in recent years and review the historical maximum decline, so that we can draw further conclusions.

03, Index Drawdown Data

Many people will say that now is different from before, and this time is very different. Then they list many reasons to show pessimism about the future trend.I'd like to share a concept with everyone: as long as the data spans a sufficiently long period, there is no such thing as "this time is different." Because the time frame is long enough, every instance of "difference" from the past is included, so when we look at long-term data, we can disregard the "differences."

The CSI 300 index retraced by 30% in 2018. This was the largest value in recent years. In the subsequent years of 2019, 2020, and 2021, the retracements were essentially less than 20%. Currently, it is approaching 20% again, and this retracement is already the maximum under normal conditions.

The ChiNext Index is the same; the retracement of the ChiNext Index, calculated up to yesterday, is 18.4%, which is also close to the maximum in recent years.

The ChiNext has a bit more volatility. In 2018, the maximum retracement reached 33%, but since then, there have only been a few instances where it approached 20%, or just reached 20%. In other words, it might be similar to the previous times where after a 20% retracement, it began to rebound and rise.

Looking at this data can give us more confidence that there is not much room for further decline, and the probability is also not high. Therefore, continuing to hold is probably a better choice than selling at this point in time.

If one's current position is relatively light, now is actually an opportunity to start buying in a slow and gradual manner.

04, The significant declines in recent years

Regarding how much further the A-shares will fall, we can also review the past declines.

The above is the trend of the ChiNext Index in recent years, starting from the worst point at the end of 2018.

In the first quarter of 2019, it rose, then fell by about 20%; in March 2020, when the pandemic broke out globally and the U.S. stock market had multiple circuit breakers, the ChiNext Index fell by 20%; by the Spring Festival of 2021, it rose to a high point again, and then fell again, also by 20%.Many people, when purchasing funds, hope that they will only see an increase after buying, with all declines having nothing to do with them. Ideally, they would buy at the lowest point and sell at the highest point.

In reality, our rational minds tell us that this is a dream, yet we persist in dreaming.

True investment returns are not about accurately buying low and selling high, but about holding on and waiting for the rise after experiencing a decline.

For example, do not expect to buy in April 2020 and then sell in July 2020. First of all, April 2020 followed a global market crash in March, and at that time, one would definitely be hesitant to buy, just like now when everyone is considering whether to sell or not, no one can accurately grasp the low point and still dare to buy.

A more likely scenario is that one bought at the beginning of 2020, endured a 20% drawdown, and then patiently waited for the subsequent rise.

A similar example occurred in 2021 as well; those who bought at the beginning of the year suffered significant losses after the crash following last year's Spring Festival, but by July, even after experiencing the crash, they still made a profit.

Many times, when we buy funds, we think we can withstand a 20% decline. Can you really handle it?

We all know that buying funds is a long-term investment that can be held for 3 to 5 years. Can you really hold them for 3 to 5 years?

If the answer to the above questions is affirmative, what is there to fear?