Newsletter commentary Jan 2024

The stock market's start in 2024 has been extremely challenging. Aside from a few days of rebound following the attention given to the stock market during the National Economic Conference, most of the time has been characterized by a general decline. There has been a significant downturn, with many stocks experiencing substantial declines. Small-cap stocks and those with high valuations have experienced even larger drops.

The current market has temporarily lost its pricing function, and many stocks are caught in a downward cycle. Some stocks, even if they have fallen to near their net cash levels and have sustained business operations, also have good dividend income expectations. However, due to liquidity issues, they continue to decline. Comparing equity and bond yields, as well as employing simple value assessments, faces significant challenges if not outright failure.

The decline caused by liquidity issues is not directly related to valuation, and it doesn't seem to have any logical explanation. The market value assessment by the State-owned Assets Supervision and Administration Commission (SASAC) and the focus on investors in the securities market are indeed commendable measures. However, addressing the current liquidity problem is a challenging task that requires long-term solutions.

Since the market has somewhat malfunctioned, it may be difficult and costly to wait for the market to naturally clear itself. The current fragile market sentiment is significant and widespread, and stock pricing serves as an anchor for many assets. 

To reverse the market's pessimism, it is necessary to address liquidity issues while also reversing expectations for the economy. Similarly to the impact of the 4 trillion-yuan stimulus package implemented in 2008, which significantly boosted national strength, the current comprehensive strength of the economy far exceeds that of the past. It is possible to actively expand demand, creatively digest some inventory in the old economy, increase investment in technology infrastructure for the future, tilt towards the service industry, facilitate the exchange of income between manufacturing and other workers, and treat population and human resources as infrastructure development.

Indeed, if we change our mindset, we can find that our current short-term problems are relatively easier to solve. We are facing a situation of oversupply rather than a shortage, which is more manageable. By breaking some constraints and implementing policies that promote active expansion, we can work towards resolving these issues.

The reality of the market reminds us of the difference between desires and actuality. We should strive to find the counteracting forces to market declines while remaining cautious of market inertia until the market's pricing ability is restored.