Non-farm payrolls shock, is there still a buying opportunity in the US stock market? GF Securities' Trudy Dai: Don't rush to bottom fish, this is just a rehearsal for recession

On August 4th, Dai Kang, Managing Director and Chief Asset Officer of the Development Research Center of GF Securities, visited the "Celebrity Lounge" live broadcast room of Wall Street News. Does the "avalanche" of July's non-farm data mean that the U.S. economy is accelerating its slowdown? Can the previously soaring U.S. stock market continue? For ordinary investors, is this a risk or a new investment opportunity? For the live replay, please click → Major adjustments in U.S. non-farm data, what expectations have changed?

1. How to interpret the market's violent reaction after the "explosion" of non-farm data?

Dai Kang: I believe this market volatility may be a "rehearsal." I previously expressed the view that there is a significant asymmetric pricing in U.S. assets, meaning that the risk of a U.S. recession has been underestimated by the market. This large fluctuation stems from the accumulation of this asymmetric pricing risk.

Since the Trump trade in May this year, the stock prices and economic data in the U.S. stock market have deviated from each other in terms of fitting and valuation levels. In particular, the ratio of cyclical stocks to defensive stocks has deviated from the hard and soft data of the U.S. economy, with a more severe deviation from the soft data. The "hard data" I refer to are actual statistical data that have occurred, can be quantified, and are regularly published by the government or authoritative institutions, such as this non-farm data. Before the release of this data, the pricing of U.S. assets had significantly deviated from the hard data benchmark, underestimating the future recession risk of the U.S. economy. After the data was released, the market's pricing for recession increased, leading to this relatively large market fluctuation.

On the other hand, from the perspective of the magnitude of the expectation miss, the significant downward revision of this non-farm data and the unexpected decline also led to a substantial downward adjustment of the hard data benchmark, impacting the previously widely anticipated soft landing narrative following the passage of the "Big and Beautiful Act." Previously, the market expected the U.S. economy to stabilize and improve, and even if technology stock trading might have anticipated or overdrawn the expectation of fundamental improvement, if the actual data could gradually improve, it could support this advanced expectation. However, the new non-farm employment figure for July unexpectedly fell to 73,000, about 30,000 lower than expected. More importantly, the data for May and June was cumulatively revised down by nearly 260,000, the largest downward revision since May 2020. This has raised market concerns about a U.S. economic recession.

Finally, from the perspective of credibility, this non-farm data is not just a simple data issue; it has more profoundly affected the market's trust in the economic data from U.S. government agencies. Before Trump took office, the non-farm employment data for 2024 also underwent a significant downward revision throughout the year. This large downward revision has once again raised doubts about the credibility of non-farm data in the market, which may even spread to other data. Currently, I believe the market's pricing of the U.S. economic outlook is still overly optimistic. The loss of credibility may amplify the market's risk aversion to various data in the future, thereby increasing market volatility. I believe that increased volatility is also a trading direction.

2. How to view the quality of U.S. economic data? How should ordinary investors avoid being misled by appearances?

Trudy Dai: I have always emphasized that in the study of asset prices, among facts, speculation, and predictions, predictions are relatively less important.

Facts come from two points: first, we must pay attention to the pricing of asset prices, not only judging the probability of winning but also assessing the odds; second, we need to validate through leading indicators and databases based on facts and speculation.

I believe that it is inappropriate to hastily conclude whether the U.S. economic data is fabricated. Looking solely at the non-farm data, it is more likely to be a technical bias. According to the explanation provided by the U.S. Department of Labor, it is mainly due to a low response rate in previous surveys, leading to significant data deviations. However, this deviation is the largest downward revision since May 2020, which raises questions about whether it is intended to align with some of Trump’s policy strategies.

Overall, the current state of the U.S. economy may be in a phase of turbulence between the old and the new, and the medium to long-term recession risks need to be monitored. The current issue in the U.S. is that it mirrors China in terms of debt structure. China has healthy central government debt but high private sector debt; whereas the U.S. has excessively high central government debt but healthy private sector debt.

What I refer to as "the old and the new intertwining" also points to the vigorous development of the U.S. AI industry trend, while the traditional economy shows structural weakness. The profitability of the AI industry is acceptable, but it is accompanied by cost reduction and efficiency improvement due to AI substitution, which suppresses new employment in the middle and lower tiers. In this round of new non-farm employment, the contribution from the private sector is at a low level, and its downward revision is similar to the total downward revision in the three months before the 2007 U.S. economic crisis. Therefore, I believe that the medium to long-term recession risk in the U.S. economy is worth paying attention to.

3. The coexistence of weak non-farm data and strong earnings reports from tech giants: How should investors make decisions? Is the pullback in U.S. stocks an opportunity to enter the market?

Trudy Dai: In response to differentiation and uncertainty, the best asset allocation strategy is to adopt what I call the global barbell strategy.

One end of the barbell strategy is to allocate stable assets, such as Chinese government bonds, short-duration U.S. Treasury bonds, high-dividend Hong Kong stocks, Chinese convertible bonds, and Southeast Asian stock markets that benefit from the spillover of U.S.-China frictions. Additionally, the gold that I highly recommend is also an important asset to cope with future uncertainties. After this non-farm shock, gold and short-duration U.S. Treasury bonds performed well, providing a strong hedge against economic downside risks.

The other end of the barbell strategy is to allocate flexible tech assets, especially those benefiting from the AI industry trend. However, unlike last year, the valuations of the "seven sisters" in U.S. stocks are already relatively high, while the valuation gap between U.S. and Chinese tech stocks remains at historical highs. Therefore, I recommend allocating Chinese tech stocks that benefit from the AI industry trend. The AI industry has evolved from a money-burning phase with no profitability to a stage where some segments have good profitability, such as computing hardware, but this also means that investors need to be more meticulous in stock selection to avoid outdated companies that are eliminated by the market.

Last year, my advice was to buy U.S. stocks on dips, but this year I believe there is significant asymmetric pricing risk in the U.S. market. The trend of the AI industry is certain, but it will also be negatively impacted by economic recession in the future. Therefore, my current advice is to sell U.S. stocks on rallies

4. Do you think gold will be the best-performing asset in the second half of the year? How much upside potential is there?

Trudy Dai: My view is very clear, gold can be bought at any time. As the ballast of the barbell strategy, it has always been an important asset allocation variety that is anti-fragile. As the impact of tariff shocks gradually becomes apparent and the probability of a U.S. recession rises in the second half of the year, gold may continue to open up upward space.

In my global barbell strategy, gold is a very robust asset. I have always emphasized understanding gold as "a perpetual zero-interest bond with super-national sovereign credit," and we must firmly believe in gold. From a long-term perspective, the three underlying logics of the reversal of globalization, misalignment of debt cycles, and the trend of the AI industry have not changed, and the uncertainty of global political and economic conditions remains high in the future. Therefore, the super-national sovereign credit value of gold is a necessary allocation to cope with the new investment paradigm of de-globalization.

There are several favorable factors supporting gold in the second half of the year: first, the logic of de-dollarization and the gold purchasing behavior of global central banks; second, the impact of tariff shocks on U.S. inflation and growth; third, the risk of future U.S. recession, whether through interest rate cuts or falling into a substantive recession, is beneficial for gold; finally, global geopolitical risks, the tail risks of conflicts such as Russia-Ukraine and Israel-Iran have not completely ended, and a de-globalization pattern has already formed.

Overall, considering the win rate and odds, gold remains one of the most cost-effective assets for allocation in the second half of this year.

5. How do you view the opportunities in the Hong Kong stock market in the second half of the year? Which sectors are worth paying attention to?

Trudy Dai: I remind everyone to pay close attention to the strategic shift in Hong Kong's financial position as a hub this year. From the stock market perspective, the A/H share premium has dropped to a nearly five-year low since the beginning of this year, and in the long term, Hong Kong stocks may continue to narrow the valuation gap with A-shares.

The short-term market needs more positive changes, but from a longer-term perspective, I believe that the current rally of Chinese stocks is more sustainable than the policy-driven credit pulse on September 24, 2024. I recommend adopting a buying on dips strategy. In the barbell strategy, the high dividends of Hong Kong stocks remain attractive, while also increasing allocations in sectors like AI and innovative pharmaceuticals. Currently, the valuation of Hong Kong stocks is not cheap, and the short-term market needs to pay attention to the progress of tariff negotiations or more favorable domestic policy stimuli.

From a longer-term perspective, the valuation gap between Chinese and U.S. tech stocks remains at a historical high, and there is still room for the valuation discount of Chinese tech stocks to narrow. There are three scenarios in the market: first, if AI and the domestic economy continue to recover, it will be a comprehensive bull market; second, if AI materializes but the domestic economic recovery faces setbacks, it will be a structural bull market, which I believe is more like the current scenario; third, if neither AI nor the domestic economic recovery materializes, the market will fall again. Overall, my advice is to pay attention to the turning point of Hong Kong's hub role and adopt a barbell strategy to buy Hong Kong stocks on dips.

6. With rising expectations for interest rate cuts, can the dollar still see recovery and rebound in the second half of the year?

Trudy Dai: The previous phase of the dollar's rebound was mainly contributed by the decline of the euro against the dollar. However, in the medium to long term, I believe the main line of global trading should be a weaker dollar The technical aspect may welcome a short-term rebound after an oversold condition, but the logic of the long-term debt cycle in the United States remains unchanged. The U.S. government is still in a cycle of unsustainable debt.

First, the risk of monetizing fiscal deficits has long existed. The "Inflation Reduction Act" continues to increase the fiscal deficit, making the risk of dollar depreciation a long-term concern. Second, the market is extremely underestimating the risk of a U.S. recession. In the second half of the year, the impact of tariffs and the fragile balance between U.S. debt and economic growth will suppress the dollar. Third, the U.S. government does not want the dollar to be too strong, as a strong dollar would increase the trade deficit. Although the possibility of a repeat of the "Plaza Accord" is low, it can be inferred that the Trump administration does not want to see a strong dollar.

7. What important time points and data should investors focus on in the second half of the year?

Trudy Dai: Well, regarding the U.S. market, there are three aspects worth paying attention to:

Tariff negotiations and subsequent impacts: The outcome of the negotiations is crucial for the impact on U.S. inflation and growth. The data on tariffs will be very important for market performance in the coming months.

Growth and deficit balance of the "Inflation Reduction Act": I have always emphasized that this is like walking a tightrope. There are significant questions about the sustainability of U.S. debt; whether the act can truly drive economic growth, enhance total factor productivity, and support debt sustainability will directly affect the judgment of assets linked to U.S. credit, such as the dollar, U.S. Treasuries, and U.S. stocks.

The independence of the Federal Reserve and the path of interest rates: The Federal Reserve is currently in a dilemma between inflation and growth; it relies on data, but the data is uncertain. Unreliable non-farm payroll data and delayed tariff inflation shocks could cause the Federal Reserve to hesitate. If the Federal Reserve makes a wrong decision, it may lead to greater swings between stagflation and recession in the U.S. The independence of the Federal Reserve will also continue to affect the credit of dollar assets.

These are the three main aspects of the global market that I believe everyone should pay attention to in the second half of the year.

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