01

In the past couple of weeks, the stock market has exhibited extraordinary volatility, akin to a rollercoaster ride filled with rapid ups and downsInvestors and onlookers alike have shifted from a bullish frenzy to a sentiment verging on despairLong-time market participants harboring years of experience found their struggles echoed in the hyperactive responses from newer investors, who experienced the rollercoaster of the market's emotional extremes in mere days.

Such erratic market behavior prompts critical reflectionDoes a substantial rise in stock market indices genuinely signal an escape from economic challenges? Will the transfer of wealth, likened to a game of hot potato, facilitate increased consumer spending? Furthermore, does an appreciation in stock prices inherently indicate improvements within the broader economy?

Currently, the stock market appears detached from conventional economic rationale

In the absence of concrete support from the real economy, how long can this collective enthusiasm last?

The theory of wealth effect suggests that a thriving stock market enhances individual wealth, thus empowering consumer spending and stimulating domestic demand.

In simple terms, as individuals witness their investment portfolios swell, they may feel emboldened to take out loans for homes or engage in premature consumptionConcurrently, businesses might see a decrease in financing costs, allowing for expanded production capacity and technological upgrades, thereby generating a positive feedback loop that stimulates the real economy and alleviates the current hesitance surrounding discretionary spending.

Although the underlying logic holds merit, bringing this theory to life in practice proves more complicated.

A primary question remains: Can retail investors genuinely profit?

Examining data from the last decade reveals that in China’s A-share market, retail investors often find their fortunes hinging on luck, with consistent losses being the norm.

For instance, during the first half of 2015, the market experienced a significant bull run, benefiting institutional investors who reported average annual returns exceeding 40%, while retail investors settled for a mere 18% return.

However, as the latter half of the year unfolded, fortunes shifted

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Amidst a turbulent market, about 70% of retail investors ended up incurring losses, often buying high and being forced to sell low during the fierce fluctuationsThe average loss exceeded 30%.

Even in 2021, after a brief market adjustment, sectors like alcohol and specific technology stocks performed remarkably well for institutionsHowever, retail investors still saw losses exceeding 55%.

Historical data underscores the systematic disadvantage faced by Chinese retail investors, who have often been overwhelmed by institutional players.

Retail investors lack advantages regarding information access, trading strategies, and emotional stabilityDuring market downturns, fear drives them to panic sell, while rebounds entice them to chase prices higher, resulting in a cycle where most struggle to escape the dismal fate of being “cut” from the market.

For the average Chinese retail investor, making money in the stock market often feels like a distant dream, relegated to anecdotes shared by social media commentators.

The recent stock market surge stems from aggressive policy stimuli, which encourage businesses and institutions to increase leverage

While regulators have stressed the need for rationality, anyone familiar with previous market crashes knows that high leverage comes with high risk.

With lingering uncertainties, any shift in market sentiment or correction could quickly lead to forced liquidations of leveraged positions, resulting in massive sell-offs.

The lessons from the 2015 market bubble burst remain fresh, though repeatedly ignored.

Furthermore, while market gains enrich a portion of investors, such growth is hardly evenly distributed.

Those with significant capital to invest generally belong to higher-income brackets, while ordinary families either lack sufficient investment engagement or bear the bruises of previous market downturns, significantly retracting their available financial resources.

Thus, while policy-driven stock market rallies may aid the real economy in theory, the actual impact remains questionable

If rising asset values do not translate into tangible benefits for everyday citizens, consumer spending will continue to lag, leaving production surpluses unaddressed.

Globally, various nations have tried using stock market surges to invigorate their economies, but few have succeeded.

02

Let's examine familiar examples, particularly Japan and the United States.

In the 1990s, after Japan's stock market bubble burst, asset prices similarly plummetedOver the span of a decade, the Nikkei index fell by 51%, and real estate prices in Tokyo declined by over 60%. Due to the reliance of Japan's banking system on investments linked to the stock and real estate markets, the ensuing crash devastated the financial system.

For the next thirty years, Japan grappled with debt repayment.

Despite aggressive interest rate cuts by the Bank of Japan, edging toward zero in an effort to stimulate economic growth, both businesses and households remained wary of high leverage

With available capital typically directed towards debt repayment, investments and consumer activities remained subdued.

It wasn't until 2013, under "Abenomics," that the Bank of Japan launched a expansive quantitative easing initiative, injecting vast amounts of currency to maintain inflation rates above 2%.

This included enabling government purchases of stock market ETFs, allowing authorities to utilize newly minted currency to acquire certain equities and bonds, along with other core strategies.

The program initiated in October 2010 with a cap of 450 billion yen, swiftly intensified to 6 trillion yen and then doubled to 12 trillion yen by 2020.

As a result, the Bank of Japan now holds approximately 37 trillion yen in stock ETFs, constituting 4.3% of the total market capitalization of the Tokyo Stock Exchange

The Bank of Japan has emerged as the preeminent single buyer in Japan's stock market, also becoming a major stakeholder in nearly 40% of Japanese listed companies.

Even after 2021, the Bank of Japan's purchasing activity in stock ETFs has slowed; nevertheless, this decade-long buying spree has laid the groundwork for the explosive growth observed in Japan's stock market.

To some extent, the remarkable stock market rise in Japan in 2023 can be directly attributed to government intervention.

However, it is vital to note that the surge in the Japanese stock market, even surpassing the heights of the 1990s bubble, has failed to invigorate the domestic economy.

In recent years, Japan faced trade deficits and currency devaluation, resulting in a decline of GDP when expressed in US dollars, with actual growth hovering around a mere 1% in local currency terms.

The challenges stem largely from persistent structural problems within the real economy, including an aging population and stagnant productivity.

Japan's economy continues to rely heavily on past glories, and the underlying foundation supporting stock market appreciation depends on sustained low-interest, unlimited currency-creation policies

Once these flows cease, the economy could regress, compromising decades of labor.

03

In contrast, the US response in 2008 demonstrated a significantly more effective approach.

The notorious subprime mortgage crisis triggered one of the most severe stock market crashes in US history, with the S&P 500 losing nearly half its value and property prices declining by one-third, coupled with widespread bank failures and a spike in unemployment, which exceeded 10%.

The Federal Reserve's strategy wasn't novel; it involved three rounds of quantitative easing that injected trillions of dollars into the market, rapidly inflating asset prices.

Furthermore, they effectively lowered borrowing costs while also distributing funds directly to households, stimulating domestic consumption.

Additionally, the US, alongside Japan, absorbed a substantial volume of dollars, stabilizing American inflation rates.

Following these measures, the S&P 500 saw a gradual recovery, beginning its decade-long ascent post-2009, ultimately reaching nearly 3,000 points by 2019—an increase of over 350%. Meanwhile, the US GDP growth rate shifted from negative to stabilize around 2-3% annually.

The US economy's rapid rebound from the subprime crisis can be attributed not only to aggressive monetary policy but also to a transformation in industrial structure, characterized by the rise of numerous tech companies bolstered by supportive policies and funding.

Tech giants such as Facebook, Apple, Amazon, Netflix, and Google emerged as key players in the post-2009 landscape

They not only altered global business paradigms but also significantly enhanced productivity in American manufacturing and services via innovative technological breakthroughs.

By 2020, these companies accounted for nearly $7 trillion in market capitalization—roughly 25% of the S&P 500. It effectively illustrates how monetary policy invigorated the stock market, while the growth of technology firms further propelled economic restructuring.

Once this positive feedback loop took shape, investor confidence surged, enabling a resurgence in economic dynamics and advancements in industrial transformations.

The logic behind this process appears straightforward.

If mirroring Japan's strategy brings about significant gains for a select few, the majority of households may not benefit proportionately, potentially suffering from low-interest strategies, currency depreciation, and inflation.

Consequently, this round of aggressive stimuli must not only aim to inflate stock markets but more crucially focus on decreasing corporate financing costs and incentivizing tech-driven innovation

True linkages between the stock market and real economy are essential to navigating challenges such as production oversupply and declining consumer expenditures.

Neither dramatic stock market booms nor busts align with national interests; instead, gradual growth is necessary for equitable wealth distribution.

Ultimately, retail investors can only profit in a stable market environmentJust as seen a decade prior in real estate, where a prevailing belief in gradual growth amplified the wealth effect, so too does the future of investing hinge on public sentiment and market stability.

Yet, it is crucial to recognize that establishing such transformations is a gradual process of accumulation