The stock market is "moving forward without hesitation," the bond market is "lying flat to the end," and the US market is unilaterally "all in" for a "soft landing."

With the US stock and bond markets performing differently from expectations at the end of last year, the market's expectation of a "soft landing" is steadily increasing.

Since the beginning of this year, US stocks have risen instead of falling, with the S&P 500 index up nearly 20% and the Nasdaq soaring 38%.

The "bond bull" has also failed to materialize - US bonds continue to decline, with yields remaining at their highest level since 2007.

This trend of a bull market in stocks and a bear market in bonds has dealt a heavy blow to Wall Street, as they predicted at the end of last year that the US stock market would decline and bonds would rise instead.

Alex Brazier, Deputy Head of Investment Research at BlackRock, admitted in an interview with Bloomberg TV that the market's performance this year has not been as expected by the bank.

What has happened, especially in the US stock market, has surprised many people.

After experiencing the most aggressive interest rate hike cycle in forty years, the US economy has not shown the signs of recession that Wall Street bearish analysts have been warning about.

So far, US inflation has slowed down, the labor market remains strong, second-quarter GDP exceeded expectations, and US stocks are still "standing tall".

All of this greatly enhances confidence in a "soft landing", as Goldman Sachs Chief Economist Jan Hatzius said:

We believe the Federal Reserve is on track for a soft landing. The data this week has been consistently good. It has strengthened my conviction.

Now, investors are more optimistic about stocks than bonds, and more so than ever before.

According to an analysis by Deutsche Bank on stock traders' strategies since 2010, US stock traders' exposure to stocks is at its highest level in history, accounting for 28%.

Beware of Risks

Currently, many investors have abandoned risk prevention measures and are unilaterally betting on the rise of US stocks, which has raised concerns among analysts. According to data compiled by the Bank of America, the price of an option contract for the S&P 500 index, which bets on a 5% drop (compared to the current level) for every $100 nominal value, is now only $3.5.

This data has reached a new low since 2008, indicating that traders have almost completely abandoned downside protection measures.

Economist David Rosenberg believes that this optimism completely ignores the signal of the "recession curve" (2Y-10Y US Treasury yield spread inversion) and the lag of the recession relative to this signal:

The fact that the Fed-induced curve inversion has always predicted an economic recession has never been respected. Hope always triumphs over experience.

The reality is that economic recessions rarely occur in the same month that the yield curve inverts. The lag is usually a year or longer - think back to 2007.

But just like the story of the boy who cried wolf, the wolf eventually appears.

Last week, Nitin Saksena, Head of US Equity Derivatives Research at Bank of America, pointed out that many investors now have the mentality that "the mission of reducing inflation has been accomplished," but this is not the case.

There is a risk that the Fed will maintain higher interest rates for a longer period, which will eventually cause something to break.

Historical Lessons

Jeanna Smialek, an economic columnist for The New York Times, pointed out in a recent article that this kind of full optimism and confidence in a "soft landing" has happened in the past:

In 2000, The New York Times published a column titled "Making the Soft Landing Softer." At the end of 2007, forecasters at the Dallas Federal Reserve concluded that the United States should be able to smoothly navigate the subprime crisis without an economic recession.

Within weeks or months after these statements were made, the economy fell into a recession - soaring unemployment, business closures, and contraction of growth.

Rosenberg emphasizes that although the current growth rate of the US economy seems normal, it is likely the result of absorbing the loose policies of the previous two years:

In a tightening cycle by the Fed, the economy typically expands at the fastest pace during corporate expansion because it absorbs the lagging effects of the previous period of loose policies. But look at what happens two years after the peak of the Fed's tightening cycle.

Historical records show that the economy invariably slows down and sharply decelerates within two years after the end of the Fed's tightening cycle.

Moreover, the mean and median of actual GDP growth decrease by about 3 percentage points. The problem is that the current benchmark growth rate is 1.8%, so the likelihood of achieving growth without a complete contraction is almost zero.

Weakening Momentum?

In addition, there is evidence that the upward momentum of US stocks is weakening. The ratio of put options to call options related to individual stocks tracked by the Chicago Options Exchange has reached its lowest level in over a year. Data compiled by Goldman Sachs Group shows that historically, this has translated into mediocre stock market performance over the next three months.

Seasonal patterns may also present additional resistance. Fortune magazine points out that over the past 30 years, September and August have been the two worst-performing months for the S&P 500 index, with the former declining by 0.4% and the latter by 0.2%.

However, there are also analysts who question whether historical experience is entirely applicable to the present.

Michael Feroli, Chief U.S. Economist at JPMorgan Chase, suggests that 2023 may be different from history because it is not a typical economic cycle of rapid growth, recession, and then recovery:

There are many unusual aspects to this inflation event, and just as we don't want to overlearn the lessons from this event, I don't think we should overapply the lessons from the past.