Correction Without Fear Looks Routine

Stocks opened modestly higher this morning, partly reversing Friday’s decline. At the moment, the Dow is up 48 points, and the S&P 500 is up .1%.  Energy, basic materials and tech are faring the best. On the other hand, communications (i.e. Facebook, Verizon) and utilities are down in early trading. The VIX fear gauge has fallen to 18 from 23 this month, which may suggest the worst part the stock market correction is over. And despite pretty sour investor sentiment—as measured by the AAII Bullish Sentiment Survey—we don’t see signs of real fear. Gold is flat today, and its down-trend going back to August 2020 is still intact. The bond market isn’t moving much today. Long-term Treasuries are down very modestly, allowing yields to edge higher. The 10-year Treasury Note yield, which is used as a benchmark for mortgage and other loan rates, jumped to 1.61% from 1.34% just 30 days ago. It may soon test this year’s high of 1.74%. With both economic growth and inflation well ahead of 3%, it’s a bit of a wonder that Treasury rates are so low.

CNBC reporter Mike Santolli addressed the scope of the current stock market correction this morning. From 9/2 to 10/4 the S&P 500 fell 5.9% and the Nasdaq fell 7.8%. The Dow’s biggest intraday drop during that period was 5.2%. But don’t miss the fact that “the majority of stocks have been down more than 10% over this period.” Examples include the following stocks currently down more than 10% from recent highs: Comcast -14%, Disney -13%, Amazon -13%, Target -14%, Apple -14%, PayPal -17%, Pfizer -18%, DuPont -19%, Caterpillar -20%, Qualcomm -25%, PPG -16%, Adobe -14%. His point is, the correction has relieved some pressure on stock valuations, bringing them back in line with fundamentals. And yet, we’re still looking at “above trend GDP this year and next.” So once we get past Covid Delta and some seasonal weakness, the market should reaccelerate.

Bears will argue that this week could be tough, what with the start of earnings season, inflation data due, and some scheduled speeches by Fed officials. Bulls will say that earnings season isn’t to be feared. According to Bloomberg’s survey of Wall Street firms, S&P 500 revenue and earnings likely grew about 9% and 24%, respectively, from year-ago levels. Zacks Investment Research says that for calendar 2021 earnings are projected to rise nearly 43%. Those rates of growth are of course not sustainable, representing a temporary but explosive rebound from Covid shutdowns in 2020. But as Zacks puts it, “We know that the earnings picture remains strong, even though the growth pace is expected to decelerate” toward more normal levels.

Covid’s Delta wave is receding. US new cases (daily average) have fallen to about 94,000 from 160,000 at the beginning of September. The nationwide hospitalization rate is down to 5.3 per 100,000 population vs. 12 at the beginning of September. The death rate per infection has settled down to about 1.6%. And the vaccination rate is slowly edging upward to 57% (66% having at least one shot).

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