Over this past week, the S&P 500 is down by 2.4%. Two Thursdays ago, we had a powerful reversal following Russia’s invasion of Ukraine. There was some hope that this could mark a bottom and that stocks would turn higher. Of course…
the implicit part of this argument is that the news flow would be positive or at least not deteriorate further.
Not surprisingly, these hopes were dashed as we gradually leaked lower and gave up the bulk of these gains with many stocks making new lows. Not surprisingly, the news flow remains precarious.
Both sides are dug in and unlikely to compromise. The secondary effects of rising energy and food prices are a negative for stocks and the economy and also could create cascading, tertiary effects like an even more hawkish Fed, a decline in discretionary spending, or political instability in other parts of the world which does seem to follow inflationary spirals.
Then, there is the simple fact that the world is a much more dangerous place today than 3 months ago. This certainly weighs on risk appetites and dents demand for stocks.
Green Shoots
Now, that we’ve laid out the brutal and unpleasant reality of the current situation, let’s talk about the ‘green shoots’.
These are the small positives that I am seeing at the moment. We’ve been noting and accounting them on a weekly basis throughout this correction.
On their own, none of these developments are going to reverse the market’s bearish trend. But, cumulatively, they can start to matter.
And, I think we’re starting to see some impact. Despite the scary headlines and volatility, the market has actually been going more sideways than down. Yes, we’ve had some scary lurches lower under the 4,200 level on the S&P 500, but we’ve found support at these levels.
Take a look at the daily, 3-month chart of the S&P 500 below:
Since the initial drop in late January, there has been so much bad news in terms of geopolitical risk, the Fed tightening, inflation, and a fattening of tail risks.
The market has absorbed all of this bad news and is above January’s low. I, see this as a positive, in a way.
It’s like when a football team throws multiple interceptions, loses a fumble, and gives up a special teams TD but somehow going into halftime, is only down by 10 points.
There’s hope that if the team can play better, it can get back into the game. And, the team is likely to play better given how bad the first half was, while the other team may be due for some miscues of its own.
Some of the other positives that we have covered in previous commentaries: Q4 earnings season that was better than expected, coronavirus case counts continue to plunge, and the market is pricing in 7 rate hikes in 2022.
To sum it up, the stock market is a discounting machine. And, it’s discounted a lot of…
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