Is gold crashing? The market is starting to diverge.

To be honest, the brutal performance of the U.S. stock market in recent weeks is largely Powell's fault. Reviewing the Fed's statements and actions from late last year to now, two key moments stand out: the December interest rate meeting and the week of April 15 when Fed officials made a flurry of public remarks, both of which had a profound impact on the market.

The first time, the Fed prematurely signaled rate cuts beyond market expectations, sending risk-loving tech growth stocks soaring. This time, Fed officials suddenly turned hawkish again, casting doubt even on the expectation of just one rate cut this year, effectively collaborating with Israel (thousands of miles away) to tank the entire stock market.

Fortunately, tensions between Israel and Iran haven't escalated imminently, making the situation seem somewhat controllable. But this week, two major macroeconomic data points are set to be released: U.S. Q1 GDP and the March PCE (Core Price Index) report. Combined with tech companies starting to report Q1 earnings in droves, these indicators could trigger severe market volatility, requiring extra caution in asset allocation.

Of course, if you're more inclined to believe tech stocks will continue leading the market, you can keep buying the dip—or even start buying now—since these stocks have already fallen significantly and are much cheaper than their peak prices. But if you're worried the AI "bubble" hasn't deflated yet and want lower-risk investments, this article might help.

01 The Fed's Metamorphosis

How to explain the Fed's behavior? In precise terms, its core strategy is to hint at potential rate cuts to provoke market reactions while retaining the option to reverse course. This lets the market react to rate-cut expectations first, after which the Fed can pivot to achieve its monetary policy goals.

In simpler terms, this "player" strategy—no promises, no commitment, no accountability—has been the Fed's playbook for the past six months. For example, the Fed said in March it would cut rates three times in 2024, but now it's clear that likely won't happen, as inflation remains far from 2% and key indicators like PCE are rebounding.

Just look at U.S. core data. Whether it's PCE or PCE excluding food, energy, and housing, both spiked immediately after the Fed signaled rate cuts in December. Though they dipped in February, they rose again in March. Essentially, rate-cut expectations themselves sabotaged rate cuts—and the Fed knowingly released those expectations, likely never intending to cut rates this year.

This raises the question: What’s the Fed’s endgame? We believe the answer lies in gauging market reactions, particularly employment data reflecting economic health, to buy time for policy adjustments.

In hindsight, Powell should be relieved he didn’t actually cut rates. After the initial signal, markets reacted overly enthusiastically, revealing investors' desperation for rate cuts. Now, Powell’s hawkish pivot mirrors his dovish turn late last year—another move to observe market feedback and inflation trends.

Remember, rate hikes or cuts are just tools, not goals. The Fed’s real aim is to avoid a hard landing for the U.S. economy amid high inflation. Among all indicators, employment—though less hyped—is a critical gauge of actual economic health.

Since the 2020 pandemic, the U.S. flooded markets with liquidity via rate cuts and debt issuance. This boosted asset prices (stocks, real estate) and fueled inflation, but it also led to a mass exodus of older workers (aged 50–60). By October 2021, U.S. retirements had surged by 3.3 million vs. January 2020, with rapid growth continuing thereafter.

These Baby Boomers (born 1946–1964), who reaped the rewards of U.S. economic prosperity, own stocks and homes and benefited massively from loose monetary policy. Their retirements created labor shortages while their consumption sustained labor demand, inverting the supply-demand balance.

Historically, economic growth relied on labor supply exceeding demand, letting capitalists minimize wages and maximize "surplus value." Post-pandemic, the opposite happened—yet the U.S. avoided recession.

One explanation, often touted by Powell, is immigration. Thanks to lax U.S. immigration policies, low-wage immigrants bolstered the labor market, easing demand overheating (many work multiple jobs to survive).

This explains why U.S. economic data stays strong while inflation cools. In February, Powell credited immigration for labor market recovery. But with elections looming, immigration policies may tighten, making sustained economic strength and falling inflation uncertain.

So, rather than cutting rates now or fueling inflation with dovish signals, the Fed is waiting and watching. Its expectation management is masterful—but under these conditions, our portfolios need reevaluation.

02 Stay Cautious

The "boy who cried wolf" game only works once. When markets unanimously expect rate cuts, inflation usually follows. But if the Fed suddenly turns dovish again, will markets still play along? Unlikely.

Currently, opinions are split: some still expect a late-year cut, others foresee high rates lasting into 2025. With Q1 macro data and earnings season underway, U.S. stocks may remain volatile and downward-trending through Q2. If inflation improves after a steep drop, rate-cut trades could revive in Q3.

Then, U.S. stocks might replay early Q1’s rally. So, even if you believe AI/tech stocks have another run left, unless you can time trades perfectly, waiting might be wiser. After all, Wall Street wants profits—but to get Fed cooperation, market fever must cool.

In early March, we noted that after tech stocks hit staggering highs, risk-seeking capital shifted to commodities. Now, geopolitical tensions in the Middle East have supercharged the latter, with prices fully pricing in past Fed rate-cut expectations.

The 2x leveraged gold ETF’s surge shows commodities at decade highs. Adjusted for inflation, gold could rise further—but whether for hedging or alpha, now isn’t the best entry point.

Gold, a zero-yield asset, naturally benefits from rate cuts (as we’ve detailed). But with global trade fragmentation post-Ukraine war and the U.S. issuing massive debt, central banks are hoarding gold, bolstering its fundamentals.

This explains gold’s resilience during hikes and high rates. Going forward, central bank demand will persist, and gold (as a "dollar challenger") still has upside—but gold stocks have outpaced gold itself, making a pullback inevitable.

That said, even if gold stocks aren’t ideal now, other opportunities exist.

First, undervalued high-dividend stocks in both Hong Kong and U.S. markets remain attractive.

The U.S. Dividend ETF’s top holdings—Lockheed Martin, Chevron, PepsiCo, Texas Instruments—span defense, oil, consumer goods, and mature semiconductors. Fed policy shifts barely affect these sectors, and in uncertain markets, high dividends often win.

Second, after Hong Kong’s early-year dividend stock rally, commodity pullbacks have investors eyeing undervalued stocks with improving fundamentals. For example, shipping/port stocks (which spiked during the Red Sea crisis) may rebound on rising freight rates in Q1–Q2.

The Baltic Dry Index’s steady rise this year (vs. 2023) signals stronger shipping rates. With Middle East tensions unlikely to ease, stocks like COSCO SHIPPING Holdings (01919.HK) and Qingdao Port (06198.HK) could benefit.

Hong Kong tech stocks have also rebounded lately, with further upside possible if China’s economy recovers. Tencent (00700.HK), for instance, has strong Q1 earnings expectations, buybacks offsetting major shareholder sales, and new game releases boosting confidence.

In short, high dividends and low valuations may dominate Hong Kong/U.S. markets until inflation improves and the Fed pivots again.

03 Conclusion

Most sectors today can’t replicate U.S. tech stocks’ 2023–early 2024 frenzy, making Q2 investing highly uncertain and stock-picking harder.

When everyone scrambles for "the next gold," markets fracture. In such times, safer bets with strict stop-loss/profit-taking rules are wiser. Preserving capital for the next rate-cut trade might be the best move for most. $TENCENT(700.HK) $COSCO SHIP HOLD(1919.HK) $QINGDAO PORT(6198.HK)

Disclaimer: This article is for educational and discussion purposes only, not investment advice.