Who will kill the bull market in US stocks?

As the monetary policy turns next year, reducing money printing may slow the pace at which asset prices are pushed up.

　　2021 Meiguo House of Representatives accused the former President Trump "sedition", the new crown virus continues to spread and inflation these events will be recorded in history. However, for the US stock market, these events seem to be irrelevant, at least not as important as some people think.

Investors who 　　track the large-cap stock index have reaped a wealth of returns this year. Morningstar's data shows that from early 2021 to December 22, the total return of the exchange-traded fund SPDR S&P 500 (SPY) was as high as 25.52%.

　Except for the U.S. large-cap stock index, other places are not worth the risk. Data shows that small-cap stocks have returned less than half of large-cap stocks over the same period: iShares Russell 2000 ETF has a return rate of 12.34%; overseas investment performance is also average: Pioneer FTSE Global Index (excluding the United States) ETF has a return rate of only 6.32% , The return rate of iShares MSCI Emerging Markets ETF (EEM) for emerging markets was -4.87%, and the iShares MSCI China ETF (MCHI) fell as much as 22.02%.

　　Bond returns are not high, iShares Core US AGG has a return rate of -1.63% over the same period, and iShares iBoxx $High Yield Corporate Bond ETF (HYG) is 3.35%. However, the performance of the fixed-income investment target selected by Barron Weekly for 2021-the closed-end leveraged loan fund-is almost comparable to that of the stock market. For example, Nuveen Floating Rate Income Opportunity (JRO) has a return rate of 23.34%. , And the risk is lower than stocks .

　　Inflation began to heat up gradually, and then suddenly accelerated. At the beginning of 2021, the CPI rose by only 1.4%, far below the Fed’s long-term goal of 2%. Peter Boockvar, chief investment officer of Bleakley Advisory Group, issued an early warning in January that the shortage of supply will push up the prices of commodities ranging from bulk commodities to DRAM chips.

　　In the fall, supply chain issues have frequently appeared in the headlines. The most severely affected ports are congested ports, and the supply of trucks and drivers is in short supply. The inflation rate rose rapidly, and the CPI rose by 6.8% year-on-year, reaching the highest level since 1982.

　　Supply shortage is only one of the problems. The Biden administration proposed a fiscal stimulus package totaling US$1.9 trillion this year, the US$900 billion stimulus package passed last year, and the US$2.1 trillion "New Coronavirus Aid, Relief and Economic Security Act" and the Federal Reserve’s “release of water” to inject water into the U.S. economy. A lot of money.

　　Under the combined effect of the two, Leuthold Group Chief Investment Strategist James Paulsen observed in January that the growth rate of the U.S. money supply was four times that of the last time the labor market was at a similar level, and the federal deficit It is also four times the last time. All of this heralds higher inflation.

　　The resulting increase in house prices is not directly included in the CPI. Earlier this year, Federal Reserve Chairman Bao Weier said double-digit growth rates are "phenomenon will soon disappear" because the epidemic prompted the family to leave the city, there is enough space to move home office single-family house.

　　However, the CoreLogic Case-Shiller house price index shows that by September, U.S. house prices have soared by nearly 20%. And as former AllianceBernstein chief economist Joseph Carson pointed out at the end of November, owner-equivalent rent (the cost of housing included in the CPI) rose by less than 3% from the same period last year.

　　Carson pointed out that this rent indicator usually has to wait 6 to 12 months to catch up with the surge in housing prices. He also said that by then, homeowners' housing costs, which account for nearly a quarter of the total CPI, will push up retail prices much more than the surge in second-hand car prices this spring.

　　In addition to the soaring housing prices, the phenomenon of speculators frantically speculating on "net red stocks" will also be recorded in the annals of history. As betting on sports events has been restricted due to the epidemic, retail investors claiming to be "orangutans" have used government stimulus checks, commission-free stock trading software and a lot of free time to try to fight against the "evil" big shorts.

　　Regardless of the motives of these speculators, most of their money in stocks is borrowed by the U.S. Treasury Department at ultra-low interest rates. After excluding inflation, the actual yield on 10-year U.S. Treasury bonds is less than -1%.

　　Low-cost funds will push up the value of assets. Because the cost of financing an investment is very low, the value of future cash flow of this investment will rise. Cheap and abundant capital makes all crazy investments seem reasonable, whether it is an unprofitable electric car company or a cryptocurrency with no intrinsic value, the latter can fluctuate by 20% in just one weekend. %.

　　In addition to the impact of the epidemic, another major factor affecting the financial market in 2021 has always been the power of currency shown by the central bank. The printing of money has brought government debt to a level never seen in peacetime, and also pushed the value of assets to a record. level. This has the same effect on the prices of the goods people buy, causing inflation to become the most worrying issue for the public and politicians.

　　When the monetary policy shifts next year, reducing money printing may slow down the rate at which asset prices are pushed up, but the impact on different areas is different. The first to be affected will be the prices of securities, then the prices of goods and services, and the process of falling prices will certainly not be as pleasant as the process of rising.