Stock Market Pull Back Correction?

For many investors, today’s big pullback in the S&P, NASDAQ, Russell and Dow Jones shows how vulnerable the stock market is for the next two months.

It’s yet another setbacks equal to one just one month ago. At this hour the indexes are limping lower. The Dow is down 600 points while the NASDAQ has plunged 3% in value. In the wake of Nvidia’s knock out Q2 report, it has investors and economists scratching their heads. It’s totally irrational, but consistent with what I’ve always said, that investing is an emotional activity.

If good is bad, then few investors can feel confident of investing in equities. This period of falling prices amists big uncertainty is not a good time to buy stocks.

Of course, if the government needs to keep rates high, and money out of the equities market, this volatility isn’t such a bad thing for them. They need to sell treasures and bonds to fund the government. Lower interest rates would make funding a deficit driven government possible. If rates, fall, we have to wonder what the Harris regime can do to keep their administration in power. Her promise to raise taxes and regulations, are yet one more knife in the back of the equities markets.

In a Forbes report today, they believe “it rather was a result of traders pivoting away from riskier equities ahead of Powell’s Friday appearance at Jackson Hole, Wyoming, delivering a speech which could reveal a less dovish Fed than now expected by investors, who are looking for much lower interest rates to bump corporate profit margins and thus stock valuations.”

It seems like there are market rotations everywhere including seasonal. And of course, September is the worst month traditionally, as investors look past the Xmas season to a recessionary early part of 2025. It will take till mid-2025 to get the economy going. Although, with this down news, the housing market might respond as sellers begin listing properties in earnest and accepting big asking price cuts.

Investors have few catalysts for confidence going forward other than GDP reports were good, corporate earnings okay (Nvidia’s was exceptional) and a FED rate cut is expected.

However, the FED rate cut forecasts are increasing fast as some are expecting up to 4 cuts this year. That news is sounding the alarm on the economy going forward. And with the bad news, companies will be rethinking their hiring plans and CapX expenditures.

Today’s pullback is a crisis of confidence and evidence of bigger shocks to come. Because shaky investor emotions can result in big selloff. Now, investors retail and corporate are nervous and likely have their finger on the sell button.  A big selloff might defuse the negativity and bring it to the base needed for a big surge in December.

This week’s jobs report is being hailed as the big event of the season which could make investors even more nervous. When investors, hedge fund managers and traders are nervous, all news might be received with trepidation.

Stratfunds Tom Lee has mentioned the danger of the September/October, and this week reiterated the worry leading up to the Nov 5th election. There is great fear that Donald Trump might lose and thus the fortunes of business could take a sizable tumble. That fear hasn’t been fully baked in, as CEO’s believe Trump will win. Without deregulation, fast FED rate drops, tax cuts, and more that the Republicans are offering, businesses big and small, would be challenged.

And given the trade split between the US and China is increasing every day, supply chain issues might be waiting just ahead.  With wars raging overseas, the price of oil is a big concern, and the US has increased sanctions against Putin and Iran.

It sets up a rocky 3 month to 6 month period for the markets. Catch up on today’s stock market news.

Earnings reports of two major Mag7 stocks were disappointing, sending investors into a selloff.  Google dropped 5% today to $172.6/share, and Tesla dropped $35 dollars since Tuesday night (-13%) to $215.99). Nvidia took it on the chin too with another 6.8% drop.

FactSet Report

Factset has offered an even split on earning guidance for Q3 2024, 5 S&P 500 companies are negative EPS guidance and 5 S&P 500 companies have issued positive EPS guidance. They reported on June 30th that the estimated YoY earnings growth rate for the S&P 500 for Q2 2024 was a nice 8.9%. And for Q2 2024, blended YoY earnings growth rate for the S&P 500 is 9.7%. For Q2 2024 (with 14% of S&P 500 companies reporting actual results), 80% of S&P 500 companies have reported a positive EPS surprise and 62% of S&P 500 companies have reported a positive revenue surprise.

Looks like that’s old news and they’re already moving forward to Q3.

Investors are always looking for market indicators, and we wonder if this is perhaps the straw that broke the camel’s back.  Corporate earnings were going to slide, so big sudden moves like this are likely a landslide, fastest to the exit response.

As I mentioned previously, these market tremors often precede a bigger correction. A correction, nor this event were part of most expert’s stock market predictions. Also, yesterday, J Powell stated that persistent high interest rates could hurt the US economy, however he did stated firmly that he and is group are determined to stick with the 2% goal. Now that he has recoiled from those statements and said the economy would be hurt if rates were not lowered.

Stocks with Biggest Price Drop Today

Is it the feared major correction or crash still ahead? It’s interesting to see markets start to bubble forward, only to get hit with unexpected negative news. Or is that the new “expected?”

Don’t Forget Political Influences on the Markets

It’s a spate of bad news hitting some investors hard and in general politics that’s driven the downturn. As I say many times over, politics is the source of market behavior today.  A healthy, unmanipulated market determines pricing, stock valuations change slowly. It’s why so many investors get caught by surprise.

One event that occurred that may be highly influential is the surge of Democrat media support for the nomination of the ghoulish Kamala Harris as the Dem Presidential nominee. It was yet one more Dem media frenzy to try to gain control of the US government and it’s one that investors don’t like.  It may have spooked a lot of people who aren’t sure Trump can win easily. However, the media’s Kamala hype will die out soon enough given she has no capacity to lead a country. The Dems will come to their senses.

The recent change in polled voter sentiment and intention is part of the market outlook too. President Trump and his pro-America policies are catching some willing ears, and this would send the market higher. A counterbalancing set of news would be required to pull stock prices back down again.

There is talk of a big rotation out of tech and Mag7 stocks to small caps on the Russell 2000 and S&P Small Cap 600 and it was happening, but in the last 3 three days, the flow has stopped.  Investors might be even more reluctant to move their money away from the Mag7 stocks which compose about 30% S&P.

Tech Heavy, Mag7 Dominated S&P is Vulnerable

The lopsided allocation means the S&P is even more vulnerable to a crash. And the Mag7 are greatly exposed to consumer sentiment and AI technology, and when consumer spending slows, tech gets hit badly.

And AI technology is greatly concentrated in the Mag7 stocks and hasn’t really reached the rest of the economy. As Dow stocks and small caps draw more interest, the Mag7’s could see a plunge (next year). The rotation of late was a head fake, as the vaunted restart of small business in America has no real legs.  In fact, as fall approaches with unemployment rising, small caps are likely to suffer.

Currently, we’re not sure of the stimulus funds into the economy and what effect that’s still having. That’s a topic that deserves much more coverage by the Dem media, but likely will never happen.

Next 3 Months Should be Rough for Everyone

In the next 3 months, we might see a consumer pullback and even more volatility heading into the election. The election results are far from certain. A Trump win would change a lot including support for US companies, deregulation, lower taxes, and cheaper energy. Some feel a Trump win will set the US markets soaring in 2025.  Lower interest rates would only help send markets upward.

Money from money markets ($6 Trillion) and cash hiding in Mag7 stocks won’t move to the small caps just yet.  This latest minor push into small caps was way too early. As Liz Sonders of Charles Schwab said yesterday, that massive mountain of money may not find a home in the tiny small cap market. If it does, small cap stocks will explode in value next year.

The Need for a Market Correction

Investment analysts and market economists speak of needing a 9% correction before the greater market can progress. They believe valuations must be reset, speculation deterred, euphoria controlled, risks handled, and the market needs to realign with the US economy.

They have the belief that a pullback is necessary before the market can move on.   Shortages of supply, including AI microchips might keep consumer and business prices high. Both Trump and Biden spoke about issues with trade with China. The inference is that the US is going xChina, and that shortages are likely to happen. Supply chains will be altered and this causes economic turbulence, potentially a mild recession before settling in 2025/2026.

More uncertainty comes from J Powell and the FED. Powell stated that he is committed to a 2% inflation target, but the economy is still above that. His hinting at rate cuts confuses investors and consumers, who are now ready to hit the selloff button.

There’s lots of banter about 2 rate cuts, and many thought one would happen in June. Inflation however is sticky

And courtesy of CNBC, here are the sectors rocketing downward (NASDAQ down almost 2% right now).  Technology is rate sensitive, and consumer discretionaries and health show concern about the economy.  However, during the next lift, these will show the biggest jump.

See more on the stock market forecast.