By Paul R. La Monica, CNN Business
the stock Exchange is like that old slogan for Timex watches. It takes a lick but keeps ticking.
Sure, it’s been a rocky start to the year on Wall Street. after an excellent year 2021. the Dow is down about 1% and the S&P500 fell 2%. Trade has been volatile. But the Dow and S&P are still just 3% below their all-time highs.
Tech stocks had a slightly wilder ride. the Nasdaq is down 5% in 2022 and nearly 8% below its peak, bringing it closer to a 10% decline known as a correction.
Yet whenever it looks like stocks could be headed for an even steeper decline, investors rush to buy the dips.
So far, traders have mostly ignored temporary concerns about inflation and the Federal Reserve getting ready to raise interest rates, as well as fears about the impact the Omicron variant of Covid-19 could have on the economy. Earnings growth remained strong despite these factors.
“It’s been a teflon market recently,” said Bill Sterling, global strategist at GW&K Investment Management, referring to the notoriously non-stick material. “Expectations have shifted a bit with a rate hike cycle starting earlier, but the market is pricing in that.”
So what needs to happen to really shake Wall Street’s nerves in a meaningful way?
“I’m not surprised by the resilience of the market as earnings and economic fundamentals are still strong,” said Larry Adam, chief investment officer at Raymond James. “But the markets are due in many ways to a pullback.”
Adam said investors need to keep an eye on the Fed. If he has to raise short-term interest rates even more than expected due to inflation, that could create more jitters in the market.
“Investors can get nervous about greater volatility,” he said. “If the Fed is more aggressive, it could spook the markets.”
Rising bond yields could still be a problem
The prospect of significantly higher long-term interest rates could also slow the economy and push stock prices down.
We don’t really know why the Yield on 10-year treasury bills remains relatively low, at around 1.77%, given the risks of rising rates and the fact that inflation is so high. Consumer prices jumped 7% over the past 12 months.
“The bond market is a mystery now with where inflation is. I don’t think rates will stay at these levels,” said Steve Wyett, chief investment strategist at BOK Financial.
Wyett added that investors need to keep an eye on Washington for the next midterm elections in November. Investors may be discounting the possibility of further stalls on stimulus efforts if Democrats lose control of the House and Senate, as some political pundits are predicting.
“We could have volatility in the markets midway through, but that’s not in the forecast yet,” Wyett said.
Yet investors can continue to drown out any noise about politics, Covid and even inflation as long as corporate earnings continue to grow at a healthy pace.
According to forecasts from FactSet Research, analysts still expect S&P 500 earnings to rise nearly 10% from a year ago. While this is a marked slowdown from the forecast 2021 earnings growth of 45% from Covid-induced lows in 2020, it’s still not something to sneeze at.
“It could be a bumpier ride for stocks with more modest returns.” GW&K’s Sterling said. “But the outlook for earnings growth is still strong.”
Stocks entered a bear market, albeit briefly, at the start of the pandemic. Major indexes fell more than 20% shortly after the first wave of the Covid-19 outbreak brought the US economy to a halt, but stocks soared on the back of the reopening of the economy, vaccines and strong profits.
So as long as the economy and profits continue to grow, and vaccines and recalls prevent companies from getting back into lockdown mode, Wall Street may not yet be ripe for another run down. .
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