Yesterday, US stocks fell sharply, especially the Nasdaq index, which is dominated by technology stocks, which fell about 10% in two days on Thursday and Friday. this is the third sharp fall since the Nasdaq fell 4.41% on April 1 and 5.27% on June 11. After the first two sharp falls, US stocks rebounded quickly and hit new highs. What about this time? Would it be any different?

First, why did US stocks plummet?

The sharp fall this time is dominated by US technology stocks, of which Apple Inc and Tesla, Inc. are the "culprits." Since Apple Inc and Tesla, Inc. split shares, share prices have risen sharply in the short term, the sharp decline to a certain extent reflects profit-taking.

From the news point of view, there are not many reasons, that is, it has risen too much, the performance of technology stocks Q2 is good, but the valuation is too high to hold up, just like A-share soy sauce.

Apple Inc's valuation has reached 40 times, not to mention Tesla, Inc., is already the price of extreme valuation.

Therefore, although the Fed has pushed interest rates near zero, after all, no matter how loose monetary policy can support the unlimited rise of the stock market, a short-term correction is very necessary to prevent the consequences of a big bubble.

Second, what should investors do?

In the face of a correction without warning, the key question now is what should investors do?

First, we should know that there is nothing wrong with the fundamentals of technology stocks, and many technology stocks have benefited from the epidemic and their performance has soared, such as Salesforce.com Inc and zoom in the field of cloud computing.

ZOOM, the world's leading manufacturer of online video conferencing, released FY2021Q2 financial data, benefiting from the demand for online meetings, the company's main indicators and guidelines for the quarter significantly exceeded market expectations. ZOOM shares rose 40% on the day, with a market capitalization of nearly $130 billion and up more than 570% year-to-date.

Salesforce.com Inc, who announced the results before that, also exceeded market expectations in terms of revenue and profit, causing the stock price to soar.

Second, since it is not a matter of fundamentals, as long as expectations of growth are in place, the killing of valuations caused by short-term sentiment will not cause the stock market to crash. What really kills the stock market is the risk of the Fed's policy shift and future interest rate hikes.

To this end, we need to take a closer look at the adjustment of the Fed's policy objectives a week ago. what is the impact?

The review of the Fed's monetary policy framework began in 2019, and the most important changes in the updated monetary framework relate to the two policy objectives of price stability and maximum employment.

1. Price stability (price stability): compared with the previous long-term inflation target of 2 per cent, it has been changed to the so-called "seeks to achieve inflation that averages 2 percent over time", which means that if inflation persists below 2 per cent, then the Fed's monetary policy will allow inflation to run above 2 per cent for a period of time before taking action. The Fed did not say how long or how high inflation would be tolerated, but Dallas Fed Chairman Kaplan finally mentioned in a media interview that it might tolerate a range of 2.25% to 2.5%.According to CICC's forecast, according to the current inflation path, if the month-on-month ratio reaches 0.1 to 0.2 per cent, US CPI inflation is expected to reach 3 per cent to 4 per cent year-on-year in the middle of next year.

2. Maximum employment (maximum employment): the updated policy goal has changed from deviations to shortfall, which may imply that the Fed pays more attention to employment repair and achieving the goal of full employment.

As a result, the low interest rate environment is likely to last longer in the medium to long term. The new monetary policy framework may all mean that before achieving full employment, the Fed can tolerate inflation for a period of time above its long-term target, allowing the economy to overheat or even overshoot to some extent. this is a clear indication of the Fed's monetary policy tendency not to raise interest rates.

Third, since monetary policy is still loose, where will the money go?

High-quality technology stocks have become a consensus in the current market, because technology stocks have become "risk aversion stocks" with stronger resistance to risks. in the face of various uncertain risks, especially in the epidemic environment, these stocks are more certain about their future growth, so they are more favored by investors. We have seen the market capitalization of the top six US companies, FAAMNG, climb from 20.8 per cent on March 23 to 23.7 per cent today.

Therefore, it is not surprising that if the market recovers, it is believed that the capital will continue to hold together high-quality technology stocks.

Conclusion

There is no doubt that with the rise of the overall valuation of the market, there are already some signs of bubble, the market needs a period of adjustment to digest excessive valuations, which is a very healthy phenomenon.

However, it cannot be said that the bubble is very serious, the market liquidity is still abundant, and the Fed continues to release very loose positive policies, so it can be judged that this is a healthy correction rather than a reversal until it is time to digest valuations. the upward momentum of technology stocks is still abundant.

At present, what we need to do is to wait for the market sentiment to stabilize, to keep an eye on whether US CPI inflation reaches 2.5%, and the time for the Fed to tighten monetary policy, so that she can "laugh in the bush when the flowers are in full bloom."

Remember, even if the end of the world is coming, it is not now.