When liquidity is so abundant, the US stock market will have adjustments, but there will not be a bear market

Bloomberg's macro strategist Simon White believes that although the market has experienced some turbulence, a bear market is unlikely to occur in this liquidity environment.

Recently, White published a compelling article that undoubtedly serves as a shot in the arm for global investors who are feeling perplexed by the recent performance of U.S. stocks.

If you have been following the market, you may have noticed that U.S. stocks have indeed hit a "pit," with major indices retreating about 5% from recent highs. At this point, many people start to feel anxious: Is this a precursor to a major drop? Should we start to panic?

White argues that the current decline in the U.S. stock market is merely a temporary correction, not the beginning of a long-term bear market. The core logic behind this is that, whether it is government finances, Federal Reserve policies, or broader monetary and market liquidity, the current state is one of "easing" or "becoming more accommodative." The author vividly points out that the "Twin Puts" from the U.S. Treasury and the Federal Reserve are at play, which is not typically the "configuration" one would expect in a bear market.

While some attribute the recent market slump to tightening liquidity, White counters that this tightening is a very short-term phenomenon. If we take a longer view, the liquidity backdrop facing risk assets is actually "constructive." Next, let's explore several key dimensions outlined by this expert to understand why, even with adjustments, the market has solid bottom support.

The Return and Relay of "Fiscal Puts"

First, we need to discuss the so-called "Fiscal Put." This is a relatively complex concept, but we can simply understand it as the Treasury's behavior of "injecting" liquidity into the market through specific debt issuance strategies.

White recalls in the article that former Treasury Secretary Janet Yellen activated this mechanism in 2023 by allowing money market funds to finance the government's note issuance, effectively countering the Federal Reserve's quantitative tightening (QT), thus enabling U.S. stocks to return to a bullish trend after the bear market of 2022. The good news is that this strategy is making a comeback and has been recognized by Yellen's successor, Scott Bessenet, who is also highly regarded in financial circles.

Data shows that when the net note issuance as a proportion of the fiscal deficit rises and is in a three-month upward trend—just like today—the stock market's returns are usually quite good.

White cites data indicating that in this scenario, "the one-month forward return is consistent with the average level, while the three-month, six-month, and twelve-month forward returns are all above the average level." Although this time the fiscal stimulus may not be as strong due to the near exhaustion of domestic reverse repurchase agreements (RRP), it will certainly not become a "deprivation" of liquidity, which is good news for risk assets.

The Central Bank's Attitude and the Safety Net of "Residual Liquidity"

In addition to the Treasury, the Federal Reserve's attitude is also crucial. This leads us to the second question of concern: Will the Federal Reserve continue to support the market? Although the market fell in the previous weeks due to concerns about the declining probability of interest rate cuts in December, John Williams, the president of the New York Federal Reserve, seemed to provide reassurance at a critical moment by stating that there is still room for rate cuts in the near term. The market subsequently rebounded.

However, White believes that this rebound is not merely based on words; it is supported by a more solid "monetary liquidity." This involves a key indicator—"Excess Liquidity."

White emphasized, "The correct way to view excess liquidity is to see it as a safety net for risk assets." Its definition is the portion of actual monetary growth in G10 countries, measured in U.S. dollars, that exceeds economic growth.

Currently, this indicator reads about +0.9. Historical data shows that when this indicator is high and rising, the downside potential for the stock market is blocked—meaning that even if there are adjustments, it is unlikely to evolve into a bear market. Conversely, it is only when this indicator is negative and continuously declining that investors should truly start to sweat and feel anxious.

Funding pressure is merely a temporary disturbance

Of course, the market is not without concerns. The recent weakness in the stock market has been partly attributed to the tightening of "Funding Liquidity," as the Federal Reserve's reserves have shifted from "ample" to merely "adequate."

This is a very technical aspect, but White reminds us not to overreact. He reviewed history, pointing out that the repo market explosion in September 2019 was just a minor obstacle for the stock market, and the event in December 2018 even turned into a "buy signal." Currently, indicators of funding pressure (such as the SOFR and reserve balance interest rate spread) have eased compared to a month ago, and the usage of the Federal Reserve's standing repo facility has returned to nearly zero levels.

More importantly, the author predicts future policy directions: The Federal Reserve will end quantitative tightening (QT) in December and may soon begin to expand its balance sheet again. This means the central bank will inject reserves back into the system, further softening the risk of funding bottlenecks.

Market consensus and subtle future trends

The article concludes with an interesting phenomenon: Currently, "the market will adjust" has become a consensus.

White maintains a cautious attitude towards this. He warns that blindly adopting a "pseudo-complex" strategy that goes against the cover of The Economist is not a wise investment. Although the liquidity framework indicates a very low probability of a bear market, this does not mean that the market will immediately "resume an upward trend" and kick off a frenzied bull market.

In fact, the internal structure of the market is changing: value stocks are outperforming growth stocks, defensive sectors are surpassing cyclical sectors, and the healthcare sector has performed the best over the past month. This is typically not the formula for a so-called "roaring bull market."

Overall, Simon White conveys a clear core message in this article: In the current environment of abundant liquidity, while U.S. stocks may experience bumps and adjustments, the probability of a systemic collapse or bear market is extremely low. What does this mean for investors? It means that while you don't have to worry about the market collapsing like it did in 2022, you shouldn't expect that just because there is liquidity support, all stocks will surge mindlessly. The author used a vivid metaphor to summarize: the current situation "is not the usual recipe for a galloping bull market, but liquidity in its various forms indicates that it is also unlikely to turn into a fierce bear."

At this stage, it is much more valuable to keep an eye on liquidity indicators and understand the dual support role of fiscal and monetary policies than to panic blindly