IS the stock market correction is running out of steam? Last Friday’s rally in stock prices brought welcome relief at the end of a sixth consecutive week of market decline. There is still cause for concern, but the antennae of opposites are beginning to tremble.
The roller coaster continues
Another mad dash for stocks last week saw a dramatic rally on Friday, but that wasn’t enough to prevent the S&P 500 from falling within a hair’s breadth of the traditional definition of a bear market – a 20% decline. The string of weekly declines is now the worst since the 2008 financial crisis.
The reset so far has been largely about falling valuations. US stocks are now trading at around 16.5 times expected earnings. That compares to nearly 23 a year ago. Other markets, such as the UK, are even cheaper, barely double digits as a multiple of earnings.
So, has the correction run its course? Much depends on the ability of revenues to continue to grow. Europe led the way in the latest Q1 reporting season, rising 40% fueled largely by much better-than-expected energy earnings. In the United States, profits are expected to rise another around 11% this year.
What interests investors?
In addition to falling valuations and still rising earnings, a few other contrarian measures turn green this week. Sentiment, as measured by the ratio of investors saying they are bullish or bearish, hasn’t been this low since the financial crisis. Fund flows to funds and ETFs are also negative after two years of inflows. And investors are no longer borrowing to invest like they did in 2020. All of this suggests that things may have gone so badly that they’re starting to look good.
The Wall of Worry
For that to be the case, however, investors will have to navigate an ongoing torrent of worrying economic news. This week started with an 11% drop in Chinese retail sales, bad news for a country looking to move away from export dependence. And here in the UK, the focus will be on inflation, with a new cyclical high of 9% expected as rising energy costs start to take their toll.
What about other assets?
It’s not just about stocks. Bond investor sentiment has also deteriorated over the past week. In particular, corporate bonds have started to reflect investor concerns. The spread between the yield of safe government bonds and those issued by riskier companies has widened sharply.
Meanwhile, cryptocurrencies such as bitcoin have taken another beating. Bitcoin price fell to $25,000 last week before bouncing back to end the week at $30,000. This is still less than half of the recent peak, showing that early hopes that bitcoin could be a useful inflation hedge were far from accurate. Crypto is more like another highly speculative and volatile asset class.
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