Fed Policy, Inflation, & Expensive Equities
For the time being, the fundamentals seems to have taken a back seat to Fed policy and rising inflation. The economic data, for the most part, is not altogether bad. Equities at this point are adjusting to the end of easy money and feel a bit "oversold" at this point. The Wealth Protection Signal is a good gauge for situations like this where equities have sold off and the downside does not "appear" in sight. The TED Spread (fear/panic) dropped like a rock last week, which means that institutional investors are not panicking. There has never been a case in the Signal's existence when the TED Spread dropped, the VIX increased, and the Signal triggered. Even though the VIX is elevated at 28, it still has a way to go to get to the high of 35 achieved in early December.
The S&P 500 Index has moved below its 200-day moving average, which is troublesome. The next support level is 4,278, which was hit on October 4th of last year. If the S&P 500 hit that mark, it would equate to a total selloff of 10.7%.
Now seems a good time to remind everyone that we get pullbacks of 8% during the year on the S&P 500 87% of the time. In addition, both the NFCI (National Fin'l Conditions Index) and the Financial Stress Index, maintained by the Chicago and St. Louis Fed branches, respectively, are indicating very little concern for the financial system. There is also talk of corporate buybacks kicking back into gear now that stocks have sold off, which could help solidify markets a little. So, while this certainly feels bad, we don't believe there is cause for concern yet.
The top 10 names in the S&P 500 last year - Apple, Microsoft, Google, Amazon, Tesla, Facebook (Meta), Berkshire, Visa, Johnson & Johnson, and J.P. Morgan - pushed the index beyond what most market prognosticators would have expected.
This year, they are coming back down to earth - with the exception of Berkshire, which is a cyclical name. In fact, 6 of the 10 names are technology or technology-related. With rising inflation and higher interest rates, we have to keep in mind that as the U.S. consumer goes, so goes the U.S. economy. Revolving credit has reached new highs - meaning consumers are stretched. And yet, excess cash, at least for the middle and lower income folks, has become depleted. Fed policy seems to have missed the increase in inflation and stocks are responding in-kind. Once we reach an appropriate adjustment level, look for cyclicals to begin adjusting first.