U.S. stocks experienced a significant decline on Monday, with all three major U.S. stock indices plummeting. The Dow Jones Industrial Average (DJIA) suffered a massive drop of over a thousand points, the Nasdaq Composite fell by 3.4%, and the S&P 500 recorded its largest single-day percentage loss since 2022. The market's downturn was primarily driven by concerns over a potential U.S. economic recession.

The Asia-Pacific stock markets opened with a sharp decline on Monday, particularly the Nikkei 225, which closed down by 12%, marking its largest single-day drop since the 1987 Wall Street Crash. The global stock market crash was triggered by several factors, with the U.S. non-farm employment data falling short of expectations being a significant catalyst. This led many investors to worry that the U.S. economy might face slowing growth and even the risk of a recession.

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The Federal Reserve's decision last Thursday to keep interest rates at their highest level in two decades also raised concerns among investors about the central bank's sluggish monetary policy actions, failing to take timely rate cuts to prevent an economic downturn. This led to an overreaction in the market, resulting in aggressive selling, and many investors are now speculating whether the Fed will cut rates sooner than expected.

However, looking at the Fed's actions, the likelihood of an out-of-cycle rate cut is not high, and it may still wait until the September Federal Open Market Committee (FOMC) meeting for the first rate cut. In the next three FOMC meetings, which are in September, November, and December, there might be rate cuts each time, with a minimum reduction of 25 basis points, accumulating to a total of 75 basis points over the three meetings. There is also a possibility that the Fed could cut rates by 50 basis points in September, using a more aggressive rate cut to support economic growth recovery.

Concerns about a U.S. economic recession have severely impacted the performance of global capital markets. Coupled with the continuous record highs in European, American, and Japanese stock markets, a substantial amount of profit-taking has accumulated, especially in U.S. technology stocks, which have shown signs of valuation bubbles. As more tech stocks release their Q2 earnings reports, some have fallen significantly short of expectations, intensifying market selling. Some tech stocks have even seen single-day declines of over 20% following their earnings announcements. Many tech stocks have fallen more than 30% from their peaks, signaling the end of the bull market driven by tech stocks.

I have previously advised everyone to be cautious about controlling risks to prevent the risk of a bubble burst in European, American, and Japanese stock markets after three consecutive years of rising markets, which could result in significant investment losses. Many investors who previously bought Nasdaq ETFs at a 30% premium rate may face even greater investment risks. If the index falls sharply, the premium rate may disappear, and the index decline could lead to a decrease in the fund's net value. Therefore, it is essential to avoid buying high-premium overseas market index ETFs and other products to prevent the risk of being caught at high levels.

Monday's global stock market experienced a "Black Monday," which had a certain drag on the short-term trends of A-shares and Hong Kong stocks. However, since A-shares and Hong Kong stocks were already at relatively low levels, the decline was not significant. In the medium term, due to the high-level pullback in European, American, and Japanese stock markets, global capital may flow back, with some funds taking profits from these markets to seek new value lows. Currently, A-shares and Hong Kong stocks are undoubtedly two major value lows, so in the medium term, A-shares and Hong Kong stocks may even experience a reversal trend.

Berkshire Hathaway, owned by Warren Buffett, released its Q2 financial report showing that Buffett made significant sales in Q2, reducing his Apple holdings by 50% and also selling his second-largest holding, Bank of America. In Q2, Buffett sold over $80 billion worth of U.S. stocks, and his cash reserves reached over $270 billion, equivalent to about 2 trillion yuan. This means that Buffett has continued his consistent approach of being fearful when the market is greedy, which is to say, when U.S. stocks are climbing steadily, Buffett chose to sell high-valued U.S. stocks at high levels. This has led many investors to worry because Buffett is always able to exit before the market bubble bursts, and this time may be no exception. Therefore, Buffett's significant sale of U.S. stocks is also an important factor in the U.S. stock market decline. Buffett's approach is worth learning for all investors: if the valuation of the invested stocks is too high, be cautious of the risk of a bubble burst and reduce the portfolio's risk by selling at high levels. This is also an important factor in Buffett's enduring investment success. Only by selling stocks at high levels to obtain a large amount of cash reserves when the market is high can one take advantage of the irrational market decline in the next market crash to pick up bargains.

A popular professional term recently is the "Sam Rule." According to the Sam Rule, when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more from the low point of the previous 12 months, the U.S. economy will fall into a recession. The U.S. Department of Labor's employment report released last Friday showed that the non-farm sector added 114,000 jobs in July, far below market expectations. The unemployment rate also unexpectedly rose to 4.3%, reaching its highest level since November 2021 and triggering the Sam Rule. Sam, the proposer of the rule, commented that the rising unemployment rate has typically meant the early stages of a recession in the past. We may not have reached that point yet, but we are very close to it, which is worrying.

Sam explained that, overall, we are still entering this stage with a relatively strong posture. If you look at all the current information about the U.S. economy, it is difficult to conclude that we are already in a recession. That is to say, the U.S. has not yet entered a recession but is close to it. Sam predicts that the Fed's policymakers may readjust their strategy to deal with the increasing risk of recession. According to historical experience, the Sam Rule proposed by Sam has been verified in all nine U.S. economic recessions since 1960. Before this FOMC meeting, Sam said on his writing platform that it was time to cut interest rates. Powell also mentioned at the press conference that he was aware of the statistical regularity of the Sam Rule but pointed out that all the data so far indicate that the U.S. labor market is normalizing. In response, Sam said that the U.S. central bank should not take immediate action, and it is important to remain calm at such moments. The Fed is very cautious and may act slowly, but when the facts change, the Fed will take action and do what they should do.

Due to the current high U.S. interest rates, the central bank now has a lot of room for maneuver. The Fed's previous monetary policy goal was to prevent inflation, so it has maintained a relatively high interest rate level. Now, with the risk of a U.S. economic recession increasing and a significant decline in the U.S. stock market, this may lead the Fed to cut interest rates for the first time at the September FOMC meeting, thereby starting a round of interest rate cuts. The Fed entering a cycle of interest rate cuts will lead to a high-level pullback in the U.S. dollar index, and non-U.S. currencies will appreciate. Recently, the yuan has appreciated rapidly, returning to around 7.1, and the appreciation of the yuan has also increased the possibility of global capital inflow into yuan-denominated assets, especially since many yuan-denominated assets are currently severely undervalued. Therefore, the global capital market is facing a major change. In the short term, the sharp decline in the peripheral market will have a certain drag on the trends of A-shares and Hong Kong stocks, but overall, A-shares and Hong Kong stocks may actually become more favored by more funds. The recent appreciation of the yuan, in addition to the enhanced expectation of Fed rate cuts, is also driven by the recent central important meeting's further reinforcement of stable growth policies, which has driven the yuan exchange rate to strengthen. So at present, everyone should maintain confidence and patience in high-quality assets, wait patiently for the market to stabilize and rebound, and we firmly believe that good assets will gradually rise back over time after being wrongly killed.