The stock market seems to be caught in a state of inertia, with no significant movement for over a month. However, experts predict that this stagnant phase is about to come to an end, and investors should brace themselves for a potential downturn.
For those who are easily bored or impatient, these past six weeks have been quite frustrating. The S&P 500, since July 13, has been hovering around the 4500 range, occasionally teasing higher and lower points but ultimately settling on this sweet spot. On July 27, it briefly reached 4607 before dropping to 4370 on August 17.
While it's true that tech stocks show promise of reaching new highs due to the rise of artificial intelligence and its impact on profit growth, most other stocks remain stagnant.
Consider the Invesco S&P 500 Equal Weight Exchange-Traded Fund (RSP), which levels the playing field by equally weighting each stock in the index. Its current value stands at $150, unchanged from early July. Throughout this period, it has fluctuated within the $146-to-$155 range.
There are two ways to interpret this market stagnation. Some may feel disappointed that the market hasn't surged ahead, but it's essential to consider the numerous headwinds both domestically and internationally.
Over the past 18 months, the Federal Reserve has increased short-term interest rates eleven times. Chairman Jerome Powell has consistently emphasized the central bank's commitment to maintaining higher rates until inflation is brought under control.
The Struggle Continues: Chinese Economy and its Impact on the Market
The Chinese economy continues to face significant challenges, even after lifting its zero-Covid policy in December. With declining exports and imports, a skyrocketing unemployment rate, teetering property developers, a sliding yuan, and uncertainty surrounding stimulus measures, the road to recovery remains uncertain.
These stumbling blocks in the economy pose a threat to corporate profits, which in turn could impact the market. As the S&P 500 reached approximately 4600, it was trading at around 20 times aggregate earnings per-share estimates for the next year. This marked an increase from just over 16 times at the beginning of the year, reflecting optimism about future earnings. However, a weak global economy could drag down these estimates and subsequently impact the market.
It is important to note that the current economic concerns are unlikely to dissipate in the near future, and if the market were to rally further, it would not become more affordable. This raises the possibility of a selloff.
If the index falls below approximately 4300, the next level of support to monitor would be at 4200. Earlier this year, it took a significant surge of buyers for the market to rise above this level. However, given the current circumstances, there is a possibility of it falling back to that level—a decline of roughly 7% from its current position. This would likely occur if the Chinese outlook does not improve significantly or if the U.S. economy weakens due to delayed effects from higher interest rates.
In a nutshell, Wall Street's main concern is that the economy is beginning to lose momentum, and there is a growing worry of a potential hard landing by year-end. Tom Essaye from Sevens Report describes a scenario where the Federal Reserve successfully reins in inflation but inadvertently triggers a recession.
Considering these factors, what is the recommended course of action? For those with a long-term investment perspective, it may be prudent to wait for a significant market drop before making any purchases.