Will Recent Negative Economic News Slow the Stock Market’s Ascent?

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

SPY – The market’s relentless advance finally took a breather as we are down about 1.5% from Friday’s high in the S&P 500 (SPY). Overall, the stock market is up about 7.5% since mid-October. While, some sort of profit-taking is healthy and to be expected, I continue to remain bullish on the market going forward. In fact, I’m noticing a steady drumbeat of negative economic news which is providing even more fuel for the stock market’s ascent. In today’s commentary, I want to discuss this strange dynamic, give some quick thoughts on energy and provide an update to earnings season as it comes to a close. Read on below to find out more….

(Please enjoy this updated version of my weekly commentary published November 11, 2021 from the POWR Stocks Under $10 newsletter).

Over the last week, the S&P 500 is down by about 0.25%, while the Russell 2000 is up 0.5%. As covered above, this seems like a healthy pause within the larger advance.

There is no evidence of distribution, institutional selling, or weakness in volume that would indicate that this is the beginning of a more substantive correction.

Instead, we have the opposite. Selloffs are on low volume with low volatility, indicating that weakness is being bought. Another positive for stock market bulls is the dour assessment of the economy by the media and general public which is adding fuel to the fire.

Finally, we have a different bottom-up view of the market which is telling a much more bullish picture than what the headlines and surveys are indicating.

In fact, all of these developments are complementary of our prediction of a big Q4 rally. They say that ‘bull markets climb the wall of worry’. Well, the latest bricks in the wall are certainly about inflation.

Currently, the market is having a panic about the latest October inflation readings. I agree that we are having inflation but disagree about the negative assessment.

Every recession in history has been followed by a period of inflation. This is the case even in periods before central banking existed. In fact, it was worse previously, because the economy was more resource-constrained than it is now.

In fact, the last significant wave of inflation came in the years following the Great Recession. Demand increased as the economy started growing, and there was pent-up demand due to more than a year of underconsumption. At the same time, there was less supply due to companies in cost-cutting and cash-preservation mode while others have gone bankrupt.

The result is inflation. And that is what happens in a more normal recession.

Think about the current situation. Companies cut supply and production dropped whether due to cost-cutting or coronavirus restrictions. There were also reasonable expectations during the initial parts of the crisis that demand would drop due to the economy slowing.

Instead, demand for goods increased sharply, aided by stimulus payments and a more robust economy than expected. Supply chain issues and transportation bottlenecks have added to the typical, inflationary pressures.

I believe we are peaking in terms of inflation being a threat. We should get an increase in consumption of services and a decline in goods demand, after more than a year of a skewed ratio. And, supply chain issues and bottlenecks should gradually improve with economies now fully reopen all over the world.

Earnings

Another reason to not be too concerned about the high inflation readings is that corporate profits showed little impact on margins. In fact, we went into earnings season with expectations of 24% earnings season and are ending it with 39% earnings growth for the S&P 500.

Profit margins also came in at 12.9% which is one of the highest levels in history. Clearly, companies are able to pass on higher costs to customers. If this stopped being the case, then it would certainly be a cause for concern.

Thoughts on Energy

After being a big outperformer for much of the past couple of months, energy has underperformed.

This is most clearly seen with oil or the XLE failing to breakout along with the market over the last couple of weeks.

In fact, it’s fair to say that oil is possibly forming a double-top. Too soon to say decisively or with certainty but it’s something to monitor. Obviously, this would have implications for our energy positions and also would set up a nice buying opportunity after a pullback.

We’ve reduced our energy position, and my gameplan is to pay close attention to how it does as it hovers around the important, $85 level. A break above $90 and we could be at $100 in a blink and a break below $80, and we would have a chance to add back shares at attractive levels.

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter


SPY shares were trading at $467.07 per share on Friday afternoon, up $3.30 (+0.71%). Year-to-date, SPY has gained 26.15%, versus a % rise in the benchmark S&P 500 index during the same period.


About the Author: Jaimini Desai


Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...


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