Last week, the market experienced a surge followed by a retreat, with an average daily transaction volume of 2,549.5 billion yuan, a significant increase in transaction volume that set a historical record. In terms of style, overall value outperformed growth, and large-cap stocks outperformed small-cap stocks. In terms of industry performance, sectors such as electronics, non-bank finance, and banking performed well last week, while social services, media, and real estate industries lagged behind.

Macro Outlook: Focusing on Risk Prevention with a Strong Fiscal Signal

On Saturday (October 12), the Ministry of Finance introduced the situation regarding "increasing the counter-cyclical adjustment strength of fiscal policy and promoting high-quality economic development" at a press conference held by the State Council Information Office. The conference clearly stated the intention to increase the counter-cyclical adjustment strength and introduced a series of targeted incremental policy measures that will be rolled out, mainly focusing on the following four aspects: 1) A significant increase in debt limits to support local governments in resolving implicit debt; 2) Issuing special treasury bonds to support large state-owned commercial banks in replenishing their core tier-one capital; 3) Utilizing local government special bonds, special funds, and tax policies to support and promote the stabilization of the real estate market; 4) Increasing support and protection for key groups.

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Although the conference did not specify the strength and amount of fiscal stimulus, it revealed a strong attitude of easing restrictions on local governments and reducing local debt, greatly alleviating concerns about the implementation of subsequent fiscal stimulus, with a strong signal significance. In terms of market impact, this conference may become an important catalyst for the market to warm up again, but the inflection point and elasticity of the subsequent market fundamentals may still depend on the strength and implementation of subsequent fiscal stimulus. The specific scale of fiscal implementation needs to wait until around October 25 or the early November National People's Congress meeting for review to be determined.

Overseas, the resilience of U.S. inflation data is strong, and the path of inflation data decline remains bumpy, and the path of subsequent Federal Reserve rate cuts still faces challenges. Specifically, the resilience of U.S. service industry inflation is still present, mainly contributed by transportation services, while the inflation pressure of core goods such as automobiles and clothing is rising again. Overall, the pressure of a second round of inflation in the U.S. is increasing, but the possibility of accelerating rate cuts has significantly decreased. In addition, the U.S. non-farm employment data for September also exceeded expectations, with the unemployment rate falling and the demand for employment in the service industry significantly expanding. However, the difficulty of expanding labor supply is relatively large, which means that the possibility of accelerating rate cuts due to unemployment is also relatively low.

Since the Federal Reserve began cutting interest rates, gold has broken through new highs and continued to rise, and copper prices have also rebounded significantly. The further differentiation of the two requires waiting for the election to land and the economic trend to become clearer, and it may be difficult to continue to develop a trend in the short term.

Market Outlook: The Market May Face Turbulence and Differentiation, with Defense Being Better than Chasing Gains

From a long-term perspective, a rational bull market generally has three development stages: The first stage is to repair extremely low valuations, characterized by stock price increases but profit repairs not keeping up; The second stage is turbulence and differentiation, adjusting the first step of unreasonable surges in individual stocks and raising stocks that have not kept up with reasonable levels, achieving a match between valuation and fundamentals; The third stage is to find the core of a slow bull market, looking for new industrial development trends or new directions for stable profit growth under policy warming. For example, after the rapid stock market repair in 2019, it also went through a period of continuous turbulence before finding the core assets and new energy as the two main lines of increase. The current market is most likely at the beginning of the second stage, and the third stage may appear next year.

In the short term, the market last week was in a state of rapid retreat after a surge, but the Ministry of Finance's press conference last Saturday may stabilize market confidence on a phased basis. However, the overall market has basically ended the stage of universal increases, and the subsequent market may usher in a period of turbulence, forming differentiation based on prosperity and policy stimulus directions, and emerging structural investment opportunities.

In terms of market style, during the short-term adjustment phase, large-cap and value styles may be more dominant, which is the direction of policy funds stabilizing the market and mainly increasing their positions, with relatively high configuration cost-effectiveness in the short term. However, after the rapid adjustment ends and the market as a whole stabilizes, the large and small cap styles may tend to be balanced, and the market may tend to look for sectors with more fundamental support and better prosperity.In terms of specific directions, the current focus can be on two main lines: the defensive line and the policy line. 1) For the defensive line, attention can be paid to large-cap stocks with overall valuation increases that are not significant and have cost-effectiveness, such as banks, electricity, precious metals, etc. 2) For the policy line, industries such as home appliances and passenger cars, which are under the background of promoting consumption and domestic demand, may still have phased market conditions, but more policies that benefit the people need to be implemented. In addition, from the perspective of long-term fundamental modifications, when the valuation of the technology growth sector is repaired to an appropriate position, sectors such as semiconductors, Apple's chain, and independent control are also worth paying attention to.

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