CWS Market Review – September 26, 2023

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The S&P 500 Drops to a Three-Month Low

Wall Street has been in a sour mood lately. As I’ve discussed before, early fall has historically been a tough time for Wall Street. It’s happening again this year. On Tuesday, the Dow had its worst day since March. The S&P 500 closed at its lowest level since June 7.

It’s as if everyone got back from the Labor Day weekend in a lousy mood. This time, investors are worried about a sluggish economy and (another) potential government shutdown. Mind you, the market hasn’t experienced a sudden drop. Instead, it’s been a slow and gradual decline. Nor has the damage been severe — at least not yet.

Since the end of July, the S&P 500 has pulled back by 6.9%. The S&P 500 had already dropped below its 50-day moving average, which can be a sign of continued weakness. The index isn’t far from its 200-day moving average (the green line in the chart above). The S&P 500 has traded above its 200-DMA without stop for more than nine months.

Counting Thursday, the S&P 500 has now had six daily drops of more than 1% in August and September. In July and August, there were zero 1% drops.

Of course, we should remember that the market had a very nice run from mid-March until late July. The S&P 500 gained 19% in 20 weeks.

As impressive as the July peak was, it was still well short of the all-time peak from early 2022. This means the stock market has gone 21 months without making a new high. And I’m not adjusting that for an unpleasant bout of inflation which isn’t fading as quickly as we hoped.

Here’s an odd stat for you. The S&P 500 has closed higher for the last 12 Mondays in a row. That’s an all-time record (via Callie Cox).

The market may be sensing a growing unease among consumers. On Tuesday, the Conference Board reported that consumer confidence fell to a four-month low. I like to keep a close eye on the report because so much of the economy comes down to how optimistic people are.

For September, the Conference Board’s Consumer Confidence Index fell to 103. That’s down from 108.7 for August. It’s the second-lowest reading for this year. In fact, this month’s number came close to dipping below May’s number of 102.5 which would have been the lowest number this year.

Interestingly, the drop in consumer confidence was felt most strongly among folks who make more than $50,000 per year.

Within the Consumer Confidence report, the Conference Board also tracks its Expectations Index. For September, that fell to 73.7. Unofficially, a reading below 80 often tells us that a recession is near. I don’t want to sound alarmist, but we should note that consumers are feeling anxious.

What’s driving all this negative sentiment? That’s not much of a secret. Consumers are worried about higher interest rates, higher mortgage rates and rising gasoline prices. America’s credit card debt recently hit $1 trillion. Overall household debt is now more than $17 trillion.

Folks are feeling the strain. Bank of America recently said that the number of people tapping their 401(k) accounts due to financial stress jumped 36% from a year ago.

Look at the bond market where we see rising yields. The 10-year Treasury yield recently hit a 16-year high while the two-year yield touched a 17-year high. In fact, the two-year yield came within 17 basis points of making a 23-year high. Two years ago, the two-year yield was going for 0.3%. Now it’s going for 5.1%.

The housing market is also feeling the squeeze of higher rates. On Tuesday, the Census Bureau said that sales of new homes fell 8.7% from July to August (that’s seasonally-adjusted and annualized). That’s the slowest pace since March.

Guess what happens when there’s more supply than demand? That’s right. Prices drop. The median price of a new home sale in August was $430,300. That’s down 2% from last year. Housing affordability is at a three-decade low.

Homebuilders are cutting prices to get rid of their homes. Interestingly, the supply of new homes was already fairly tight. The problem is that higher mortgage rates are holding back demand.

Expect 10% Earnings Growth for Q3

This week is the final week of trading for Q3. In a few weeks. the Q3 earnings season will start up. The overall earnings results should be pretty good, but that’s largely because earnings one year ago were weak.

Right now, analysts expect earnings to be up nearly 10% compared with last year’s Q3. Wall Street sees the S&P 500 reporting earnings of $55.27 per share. (That’s the index-adjusted number. Every one point in the S&P 500 works out to about $8.35 billion.)

This is a big downward shift in expectations. In the middle of 2022, Wall Street had been expecting Q3 2023 earnings of more than $63 per share. Over the course of the last year, analysts gradually pared back their Q3 estimates by more than 13%. Recently, however, earnings estimates have increased a little bit. The first reports will start coming in in about two weeks.

As important as earnings are, we also want to see the kind of guidance that companies are willing to offer for the rest of this year and into 2024.

Last year was tough for earnings. For all of 2022, earnings were down just over 5% from 2021. That means earnings growth this year will be helped by favorable comparisons. For Q4, Wall Street currently expects earnings growth of close to 14%. If that’s right, it means the S&P 500 will deliver full-year earnings growth of 11.7%.

That would place full-year earnings at $220 per share and next year’s earnings at $245 per share. That means the S&P 500 is going for 17.5 times next year’s estimate. That’s a little pricey, but I don’t think it’s unreasonable. Right now, the worry isn’t valuations but rather that earnings growth is falling off.

Here’s the S&P 500 along with its earnings. The two lines are scaled at a ratio of 20 to 1. That means that whenever the lines cross, the S&P 500’s P/E ratio is 20.

The S&P 500 is the black line. Earnings are the red line. The green line is Wall Street’s earnings forecast.

The largest tech stocks are looking very stretched. Charlie Bilello points out that the 10 stocks in the S&P 500 now account for 30.5% of the index’s value. The other 490 stocks comprise the other 70%. The Russell 2000 index is down for this year.

There’s more news to come this week. Tomorrow, we’ll get the durable goods report. Wall Street is expecting a drop of 0.5%.

On Thursday, we’ll get the latest report on initial jobless claims. These reports have been quite good recently. We’ll also get the final revision to Q2 GDP. I’m not too concerned about this report since it covers a time period that began six months ago and ended three months ago. We’ll also get the report on pending home sales.

On Friday, we’ll get reports on personal income and spending. Along with this report, the government will include the PCE price data which is the Fed’s preferred measure of inflation.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on September 26th, 2023 at 5:40 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.