A Tentative Buy-the-Dip Bid

Thus far, it has been a losing week for the stock market and it seems unlikely that something will change so dramatically today to make it a winning week. The equity futures market, however, is pointing to a modestly higher start.

Currently, the S&P 500 futures are up 14 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 91 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 35 points and are trading 0.1% above fair value.

This can be considered a tentative buy-the-dip bid following the large losses that have the Russell 2000 and Nasdaq Composite down 3.5% for the week and the S&P 500 down 2.7%.

That weakness can be tied directly to two, driving forces: weakness in the mega-cap stocks and rising interest rates.

The 2-yr note yield has climbed nine basis points this week to 5.12% (but it had been as high as 5.20%) and the 10-yr note yield has climbed 13 basis points to 4.47% (but it had been as high as 4.49%).

The move in rates has been fueled by a variety of factors ranging from higher oil prices to quantitative tightening to Fed Chair Powell’s suggestion that the neutral rate may be higher than the estimated longer-run rate of 2.5%.

The specter of higher rates has cast concerns about a slowdown in borrowing, a slowdown in consumer spending, a slowdown in earnings growth, and a pickup in competition for stocks versus alternative, and less risky, investments.

We are not only witnessing falling stock prices this week, but also multiple compression as stock prices have fallen at a rate faster than earnings estimates. In fact, earnings estimates haven’t fallen at all. According to FactSet, the forward 12-month EPS estimate for the S&P 500 sits at $239.17 today versus $238.64 at the end of last week.

The multiple compression could eventually be the antidote for the sickly-looking stock market, but the cure won’t come quickly if interest rates continue to rise. That’s why market participants remain fixated on the Treasury market and the Fed’s incantations on policy matters.

There are some other distractions in our midst today, however.

The Bank of Japan left its ultra-loose monetary policy unchanged, as expected; Bloomberg has reported that China is looking at relaxing restrictions on foreign investment; the U.S. government appears to be on a path to a shutdown on September 30; the UAW appears to be on a path to an increased strike action today; and many consumers will be on a path to their local Apple (AAPL) store today to purchase the new iPhone 15 and/or Apple Watch Series 9.

The path the stock market walks is apt to remain a bumpy one, knowing that the uncertainty factor has been increased this week with the Fed’s explicit and implicit signals.

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Originally Posted September 22, 2023 – A tentative buy-the-dip bid