(Bloomberg Opinion) — All durable bull markets need bursts of positive sentiment to keep them moving higher, and the next month is shaping up to be a good news desert.
First, consider the prospects for monetary policy to land. A rate cut that seemed inevitable a few months ago has apparently been delayed, perhaps until mid-summer. While I am optimistic about inflation over the medium term, the market has just digested two consecutive CPI reports in which monthly core inflation was higher than expected. Yes, excessive seasonality at the beginning of the year may be a factor in making this data noisy, but that may also affect March.
Therefore, there is no reason for Fed Chairman Powell to encourage policymakers to implement easing policy when they meet later this month, and his comments may prompt traders to price in a first rate cut even later.A third blow to inflation will also push the market narrative in a more hawkish direction: some traders will abandon bets on a rate cut in 2024 altogether, warning Hiking Will spread in the financial media.
Next comes the prospect of profit. Artificial intelligence giants Nvidia and Microsoft clearly have momentum, but investors will have to wait until their next quarterly reports in late April and May to see another dose of their hopes and dreams.Of course, investors will hear CEO Jensen Huang speak at the annual Nvidia GTC artificial intelligence conference Meeting The event began on March 18, but history shows it rarely becomes as much of a stock market catalyst as quarterly profit guidance.
The stock’s median one-month return since the start of the session is about 2.8%, which is actually below normal for a stock that’s been growing at a compound monthly rate of about 3.3% since 2009.
What about the U.S. consumers who have aggressively added to their holdings of Amazon and bought shares of Abercrombie & Fitch Co.? They’re still there, but their enthusiasm for spending money seems to have diminished. A report on Thursday showed that U.S. retail sales fell in February after falling in January, according to the so-called control group, which excludes food services, auto dealers, building materials stores and gas stations and ultimately affects gross domestic product. Flat. .) The services economy may be improving, but the push for overall consumption appears to be fading in the coming months.
These are not “liquidate your stock portfolio, buy Treasury bonds and hide in a bunker” type of thing. However, this is against the backdrop of rising P/E ratios, and I can only wait leisurely for so long. At a forward price-to-earnings ratio of 21 times, current valuations are well above pre-pandemic normal levels and close to 2021 levels.Price-to-earnings drift is partly a rational reflection of indexes that are more weighted toward fast-growth technology stocks and communications services stocks with low financial leverage and high returns on equity (as I said here Back in January. ) But no matter how I revise the data now, I can no longer deny that large-cap U.S. stocks look expensive. While not bubble-level expensive, it’s still rich and in need of new inspiration.
While the index gained 1.1% in March, in some ways the long-awaited market pullback has already arrived. Consumer Staples (+1.4%) beat Consumer Discretionary (-2.3%); Gold was one of the best-performing commodities; and the once-famous “Big Seven” growth stocks have now become NVIDIA, Dumpster Fire Tesla Inc. – and five other so-so stocks.
The current background is actually a bit like 2018. Then, as now, the market was coming off a stellar year. Interest rates have remained higher for longer than markets hoped or expected. Notorious loose cannon Donald Trump sowed the seeds of policy volatility on social media (at the time, by waging a very public trade war with China). From peak to trough, this gives us an overall market decline of 19.7% through December 2018. I’m not saying the next pullback will be the worst-case scenario; there are plenty of reasons to be optimistic in the medium term. But markets can’t keep rising forever.
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Jonathan Levine at (email protected)
