Weekly Review — Rate Cut ≠ Easing, US Stocks Are at an Inflection Point

This week, the U.S. stock market can be said to have undergone a significant washout, falling nearly 300 points for three consecutive days. What truly dragged the market down was the Nasdaq. The S&P and Russell have already reclaimed their 20-day moving averages and are even hitting new highs, but the Nasdaq is clearly still underwater. This indicates that this sell-off wasn't about the broader market, but rather about tech, high valuations, and the most liquid assets.

This wave of decline wasn't due to a loss of sentiment; it's more like the market is repricing one thing: what the new Fed Chair Walsh truly means. After Trump formally nominated him, Wall Street actually started taking it seriously. Because Walsh has consistently opposed the normalization of QE, emphasizing that market problems should be solved by the market itself, and is unwilling to provide a backstop just because stocks fall. For a market long accustomed to Fed support, this is a very substantial change.

More crucial is his policy mix: cutting rates while shrinking the balance sheet. On the surface, it looks like easing, but in reality, it's draining liquidity. The Fed currently holds about $6.6 trillion in assets, with the goal of shrinking towards around $3 trillion. This means reserves will be continuously drained, and dollar liquidity will become increasingly tight. This combination of price easing and quantity tightening is historically rare and is what truly makes institutions uneasy.

From an institutional perspective, the first reaction is never whether stock prices are cheap, but whether the entire portfolio is safe. Once it's judged that the dollar may face a period of shortage, institutions often first sell the most liquid assets: Nasdaq heavyweights, cryptocurrencies, and even some precious metals. That's why we see that the hardest hit recently are precisely these easiest-to-sell, fastest-to-liquidate varieties.

Friday's rebound looked more like a technical short-covering rally. The indices hit key moving average levels, like the 120-day line, forcing shorts to cover, otherwise they'd be vulnerable to a squeeze if a rebound occurred. But how far this rebound can go is actually quite limited. If there's no new incremental capital in the follow-up, the market will likely remain weak and choppy, not ruling out testing lower ranges again.

In the medium term, as Walsh officially takes office and policies become clearer, the market will gradually adapt. Combined with the high probability that Trump will use tax cuts, rate cuts, and increased investment to stabilize the economy and the market before the midterm elections, U.S. stocks aren't without a chance to regain strength. But this process will definitely be one of repeated volatility, not a smooth ride.

So the current strategy is to prioritize defense over aggressively betting on a rebound. In terms of asset allocation, gold is still worth holding as a core hedge asset. It's not a commodity, but a tool to hedge against currency credit and liquidity risks. At the same time, more attention should be paid to tech leaders with stable cash flow, AI infrastructure companies with long-term B2B contracts, high-dividend value stocks, as well as consumer staples, utilities, healthcare services, energy, nuclear power, and real resource assets. These directions share a common trait: clear cash flow, inelastic demand, and not relying on loose liquidity to tell a story.

From a longer-term cycle perspective, the future isn't a world of "dollar collapse, gold or crypto replacing the dollar," but a system with clearer division of labor: the dollar as a liquidity tool, gold as a credit hedge anchor, AI as a wealth creation engine, and crypto assets more as risk assets on the fringes of the system. The signals that truly need vigilance are still whether repo rates spike abnormally and whether the 10-year Treasury yield continues to rise. If these two signals strengthen simultaneously, do you think the market has really fully priced in the risks now?