How Recent Bearish Sentiment Will Impact the Stock Market

NYSE: SPY | SPDR S&P 500 ETF Trust News, Ratings, and Charts

SPY – Last week, the S&P 500 (SPY) fell during a short trading week. Multiple factors were weighing on investor sentiment. First was September’s history for being a weaker month for stock performance. In addition, the previous week’s August payrolls miss seemed to linger on investors’ minds due to concerns that the delta variant of COVID was slowing the rebound in the economy. The real estate sector led declines as long-term interest rates increased. Consumer staples and utility stocks performed the best. In terms of market cap, the small-cap Russell 2000 Index underperformed the market after two strong weeks of outperforming the larger benchmarks. Growth stocks also outperformed Value stocks. I’ll discuss this and more below….

(Please enjoy this updated version of my weekly commentary published September 15, 2021 from the POWR Value newsletter).

Five of the last seven trading days have been in the red. While I don’t believe we are headed for a bear market, there’s no question of bearish sentiment. Last week, we saw four straight days of losses. In addition to the August payrolls miss, investors were also concerned about political uncertainty. In previous weeks, it was monetary policy that was front and center.

Now, there is a concern over fiscal policy and the infrastructure bill. We learned last Wednesday that Senator Joe Manchin only backs $1 trillion of President Biden’s $3.5 trillion proposed spending plan. It’s my belief that the Street is counting on this package, and it doesn’t go through; we could see heightened volatility.

In addition, inflation worries continued to weigh on investor sentiment. On Friday, the Labor Department reported that producer prices rose 0.7% in August. While this was a slowdown from July’s 1.0% gain, it was above the consensus expectation of a 0.6% increase.

However, we did get a slight reprieve on Tuesday after the Labor Department released its August consumer price index (CPI) data. It showed there was still a heightened level of inflation in consumer goods and services but a pullback from the recent multi-year highs.

The CPI grew 0.3% in August, below expectations of 0.4% and the 0.5% posted last month. It rose 5.3% year over year but lower than July’s 5.4% pace. Core CPI, which doesn’t include food and energy prices, also slowed more than expected. This figure came in at 4.0% year-over-year after rising by 4.3% in July.

This inflation data suggests that price pressures may be beginning to unwind slowly. Nevertheless, the tight labor may signal further profit margin issues for companies. Based on the JOLTS data released last week, there were a record 10.93 million positions waiting to be filled in July. This was almost 1 million more than the consensus estimate.

Not to beat a dead horse, but bears continue to be concerned about COVID’s effect on the economic recovery. Consumer demand is weakening, and while there are no lockdowns in place, the Delta surge is limiting in-person activities such as traveling, eating out, and shopping.

Supply-chain disruptions are also lasting longer than expected. There is still a shortage of semiconductors, leading major automakers to close down factories, and the scarcity of labor and materials is slowing production and pushing prices higher.

On the global front, the second-largest economy is not only cracking down on technology companies, but China’s economic growth is slowing rapidly. Earlier this week, the Financial Times reported that Beijing was looking to break Alipay and separate its lending business.

Then today, we learned that China’s retail sales grew 2.5% year over year in August. This was well below the 7.0% gain expected and the 8.5% pace posted last month. In addition, industrial production has also pulled back.

Yes, there are still reasons to be positive. Corporate earnings and projected growth remain strong. As I mentioned in last week’s commentary, September has been the worst month for stocks, and the S&P 500 has not had a 5% correction since last October.

So, the recent string of down days was expected. Plus, it presents buying opportunities for value investors.

What To Do Next?

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares . Year-to-date, SPY has gained 20.39%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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