February 14, 2025
The stock market is stuck.  Why is its next step lower?

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The stock market has come to a standstill. It hasn’t moved for over a month. Of course, it’s inevitable that this inertia will end, but investors likely won’t like the new direction – the decline.

For those impatient or easily bored, the past six weeks have been frustrating. Since July 13, the S&P 500 has traded at around 4500 from 4510. It flirted with high and low points, but settled in that sweet spot. For example, the index peaked at 4607 on 27 July and fell to 4370 on 17 August.

To be sure, tech stocks are close to breaking new highs as the advent of artificial intelligence is driving higher profit growth, but most other names are in the middle of a range.

The Invesco S&P 500 Equal Weight Exchange-Traded Fund (RSP), which eliminates the influence of Big Tech by equally weighting every stock in the index, is at $150 — flat from its early July lows and up from $146 to $155. The border since then in the middle.

There are two ways of looking at market sluggishness. One has to be disappointed that he hasn’t charged ahead. And yet, consider the adverse conditions both at home and abroad.

The Federal Reserve has raised short-term interest rates 11 times in the past 18 months – and Chairman Jerome Powell has made clear several times that the central bank intends to keep rates high until inflation is under control.

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And even after lifting its zero-Covid policy in December, the Chinese economy is still struggling. Exports and imports have plummeted, unemployment has skyrocketed, the biggest property developers are on the brink, the yuan is slipping, and Beijing is indecisive about stimulus.

These economic constraints pose a threat to corporate profits. Low profits will affect the expensive market. When the S&P 500 hit 4600, it was trading at nearly 20 times total earnings per share estimates for the next year — up from just over 16 times to start the year. This bounce reflects optimism about earnings so weakness in the global economy could drag down estimates and markets.

The thing is: The economic crisis isn’t going to go away anytime soon and if it does go up, a market selloff isn’t in the cards.

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If the index breaks below around 4300, the next “support” level is 4200. It climbed above 4200 earlier this year when buyers rushed in. And it could fall again to that level — a decline of about 7% from here — if China’s outlook doesn’t improve much or if the US economy weakens from any delayed fallout from higher rates.

Wall Street’s worries in a nutshell: “The economy is starting to lose forward momentum and … concerns of a hard landing between now and the end of the year could start to grow,” The Sevens Report’s Tom Esse describes one such scenario. where the Fed reins in inflation but at the same time puts the economy into recession.

So knowing all this, what path should be taken? For those looking to buy for the long term, waiting for a meaningful decline is the way to go.

Write to Jacob Sonenshine at [email protected]

Source: www.barrons.com

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