The release of U.S. inflation data for October has captivated global attention, revealing a year-over-year Consumer Price Index (CPI) increase of only 7.7%, better than the anticipated 7.9% and the previous figure of 8.2%. This unexpected positive news led to a significant surge in the stock markets. The Dow Jones Industrial Average jumped by 3.7%, the S&P 500 soared by 5.5%, and the Nasdaq Composite Index experienced an impressive rise of 7.3%. This increase marked the largest single-day gain for the Nasdaq in the past two years, highlighting the market’s excitement and optimism.
Following the U.S. market trend, international stock markets also erupted in response to the favorable inflation news. Germany’s DAX index climbed by 3.5%, while France’s CAC 40 rose by 2%. The momentum continued into Asia, where the Japanese stock market surged by 2.8%, South Korea matched this rise with an identical increase, and the Australian index climbed by 2.6%. The Hang Seng Index in Hong Kong experienced an incredible 5.5% rise, while China's A-shares also reflected this bullish sentiment, with the ChiNext Index (China's NASDAQ) increasing by 3.6% as the Shanghai Composite Index opened up by 2%.
The underlying logic for the positive reactions to U.S. inflation control and the ensuing global stock market rally is multifaceted. For several months, I have highlighted how U.S. monetary policy has been one of the most significant influences on global markets. Since March, the U.S. Federal Reserve has raised interest rates six consecutive times, bringing the federal funds rate to 4%, the highest level since January 2008. These rate hikes have consequently caused a repatriation of the dollar towards the U.S., creating liquidity constraints and prompting downward adjustments in global stock markets.
Such monetary tightening has also led to a corresponding decline in investments in the stock market, primarily driven by rising bond yields. The Nasdaq, for instance, has experienced a decline of over 30% this year, with Meta (formerly Facebook) at one point suffering a staggering drop of more than 70%, marking it as one of the hardest-hit tech stocks in the U.S.
Despite multiple rate hikes, the CPI data had remained troubling without much optimism until this latest report, which was unexpectedly encouraging and marked the first drop below 8% since March. This significant improvement lays the foundation for potential adjustments in future monetary policy. Fed's Harker indicated support for pausing rate hikes once the federal funds rate reaches around 4.5%.
This suggests that the peak of rate hikes might be just around the corner. Historically, once rate hikes plateau and inflation is brought under control, markets can anticipate a dramatic shift in monetary policy, potentially leading towards rate cuts. Harker's insights indicate, “I believe we are nearing the peak of this particular round of rate hikes,” pointing towards a probable stabilization in 2023.
The situation may, in fact, be more optimistic than anticipated. Each pivot in monetary policy tends to correlate closely with the capital markets; these turning points often signal shifts for the markets themselves. March 2020 was such a moment when global monetary policy transitioned to a more accommodating stance in response to the Covid-19 pandemic. Central banks, particularly those in Europe and North America, unleashed unprecedented liquidity into the markets. This environment facilitated a bull run in stock markets, with the U.S. not only bouncing back sharply but also hitting new highs.
On the other hand, March 2022 heralded the tightening phase, indicating a move away from loose monetary policies. This shift caused stock markets globally to retreat, with the Chinese stock market experiencing the most significant adjustments among major financial markets. The likely reversal next year towards looser policies could mean a limited downside risk for global markets, with chances for a bullish rally, albeit potentially subdued in scale and scope.
Nevertheless, a crucial issue the global economy currently grapples with is the stagnation of technological innovations. The benefits of internet technologies seem to be reaching their saturation point, akin to the situation over two decades ago before the last wave of disruptive technologies emerged. Industrialization is at the core of modernization, and without substantial technological advancements, sustained economic growth will be a challenge, stifling the potential for bullish stock market trajectories.
Reflecting on the past five years, the emergence of new unicorn companies has slowed significantly. In the U.S., only Tesla stands out, with other tech companies having established their brands two to three decades ago. Even Tesla, despite being a leader in electric vehicles, has been around for over a decade.
Conversely, China has made notable advancements, particularly in the renewable energy sector. The country boasts the largest solar power production capacity globally, reshaping the global energy landscape and contributing significantly to pollution reduction. Moreover, companies like CATL have positioned themselves as leaders in battery storage technology, while electric vehicle manufacturers, including BYD, have rapidly ascended to global prominence. However, both the solar and electric vehicle sectors primarily serve as substitutes for existing products.
The stagnation in cutting-edge technology development is a shared challenge many nations face; the lack of breakthrough technologies that drive substantial productivity increases hampers the emergence of dominant firms capable of sustaining bullish markets. Companies like Apple exemplify how technological advancement can lead to remarkable financial growth—its revenues ballooned from $24.5 billion in 2007 to an astounding $394.3 billion in 2022, equivalent to the GDP of an entire province like Jiangxi.
Amazon's growth trajectory reflects a similar pattern, with revenues escalating from $14.8 billion in 2007 to $469.8 billion in 2021. In China, companies like Xiaomi, established in 2010, saw revenues surpassing 300 billion yuan last year, while JD.com, founded in 2011, grew from 21.1 billion yuan to over 950 billion yuan by 2021. Alibaba, established somewhat earlier, also exhibited impressive growth, with revenues soaring to over 850 billion yuan in 2021.
In this rapidly changing landscape, sustainable technological and financial growth is indispensable for continued market performance. The current dilemma facing capital markets can be described as transitional; while established giants show signs of stagnation, emerging industries within China, such as solar power, lithium batteries, electric vehicles, and semiconductors, continue advancing swiftly. This trend offers a glimmer of hope amid the broader stagnation, reflecting resilience and potential within specific sectors.