- The financial market has experienced choppy actions in a narrow channel with low volume, leading to frustration and confusion among investors due to the lack of significant movement in the S&P 500.
- While there are factors supporting the equity market, such as declining inflation and favorable supply and demand, investor sentiment remains mixed and cautious, with signs of a possible economic downturn.
- The market is in a period of indecision, with companies seeing their shares fall and trading at low multiples of earnings, while the Fed is expected to raise interest rates in the near future, which could lead to fluctuations in the stock market.
The financial market has been experiencing a series of choppy actions in a narrow channel with low volume for weeks. The S&P 500, one of the major US stock indexes, has been mostly flat for the week, moving just 1% daily this month.
Currently, it is at a level that is halfway between its all-time high reached last year and its low during the bear market two years ago. This situation has generated frustration and confusion among investors, both bullish and bearish.
Those who turned bullish based on momentum signals from the October and January lows had their conviction undermined when the S&P 500 stopped exactly at the level suggested by the charts (4200) and the market breadth showed weakness along the way.
On the other hand, bear investors are perplexed by market resilience despite persistent signs of an economic slowdown, declining corporate profits, ongoing Fed tightening, concerns about a potential credit crunch after the regional banks’ mini-panic and the US debt ceiling gap looming on the horizon.
Bespoke Investment Group, an investment research firm, summed up this situation after the close on Friday, as mentioned by CNBC in a recent report, noting that “For all the talk about whether we are in a new bull market or if we are still stuck in a bear market, at this point, it looks like it is neither. If you want to call it a bear market, it looks as wild as a koala, and if you’re going to go the bull route, it’s raging more like a cow than a bull. ”
General weather conditions offer some support, albeit confusing, to the stock market and partly explain why the indices have not experienced a severe collapse since late last year. Declining inflation has historically been positive for the market, the supposed impending recession has not been confirmed, the S&P 500 has matched the average bear market decline last year despite reaching all-time highs, and recent bank failures have brought forward expectations of a pause in Federal Reserve tightening.
According to Bespoke, the S&P 500 has gone six months from the bottom of a 20% drop without revisiting that low for the 14th time since World War II, and in most previous cases, the S&P 500 is up six and 12. months after this event.
Henry McVey, chief investment officer at KKR & Co., notes that the supply and demand for shares have become more favorable, with few new issues and corporate buybacks underway.
However, market sentiment is still mixed, with hedge funds and other tactical players holding onto indices, but in a cautious mood overall. Surveys by Bank of America and JP Morgan show stock allocations or intentions to raise near record lows among professional investors. Retail investors are also risk averse, seeking short-term bonds and cash, despite low yields, indicating some uncertainty in the market. In summary, while there are certain factors that support the equity market, investor sentiment remains mixed and cautious.
So then, there are signs of a possible economic downturn, such as leading economic indicators, inverted Treasury yield curves, and rising jobless claims. Furthermore, the stock market’s recovery from the October low has been weak compared to other bull markets, with limited gains and lagging sectors.
A market valuation is at high levels and volatility has been low due to a lack of significant movement in the S&P 500. Some companies are noted to have experienced declines in their shares and are trading at low multiples of earnings, which could indicate that the market is considering macroeconomic risks.
Finally, the market is in a period of indecision and the Fed is expected to raise interest rates in the near future. Although stock market fluctuations are expected due to earnings reports, they are not expected to be a broad catalyst for the market. In general, it could be said that the stock market is in a consolidation phase.
