This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m.
I think the market has the case of the blahs.
While I really enjoyed watching Salesforce and C3.ai shares explode higher post earnings last week, hot movers along these lines have been too few and far between (in either direction) in recent weeks.
But if you take a step back and level set the stock market today, the muted action kind of makes a great deal of sense.
Investors are facing a fresh dilemma — call it paralysis by analysis amid all the incoming data flying in. On the one hand, we have hot retail sales and inflation reports from the government — both calling into question whether the Federal Reserve is moving fast enough to squash inflation.
On the other end of the spectrum, the jobs market continues to be solid (as probably seen in this week’s jobs report). Yet, when you look at fourth quarter earnings (and conference calls) from Best Buy, Home Depot, Target and other retailers, you will see consumer weakness in big ticket merchandise. Dig into Target’s earnings, and you will see a shopper trading down to cheaper private label goods because they are less inflationary and they just got laid off by a tech company.
Taken together, this is a confusing time to be an investor – something market maven Keith Lernerat Truist captures in a new note he sent me:
The recent action is very much aligned with a key market dilemma we have been highlighting: If the economy stays stronger, as we have seen recently, Fed policy is set to remain tighter, and this will weigh on market valuations. Or, instead, if the economy weakens, this will pressure profits. Neither of these outcomes are favorable for premium market valuations.”
In other words, Mr. Market doesn’t know what he wants!
And if you think all the bad news of any kind is priced into stocks, Lerner adds these considerations:
For perspective, the S&P 500’s forward P/E of 17.6x is still slightly above the 10-year average of 17.2x, and that’s in the context of a high degree of uncertainty around economic growth, inflation, and earnings. Forward earnings estimates are hovering near a 52- week low, and downside risks remain. The 1-year U.S. Treasury yield has jumped above 5% for the first time since 2007, and the 10-year U.S. Treasury yield, which is hovering around 4%, is nearly double the average of the past decade.”