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When Does This Freddy Krueger Movie End?

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Market indices are closing this Hump Day off session lows, but only politely. This bad Freddy Krueger movie market — don’t fall asleep, or you’re under attack! — doesn’t seem like it’s ever ending. The only ironic thing is that Friday the 13th was last week, and it was one of the best days on the markets all year.

Wait! That's "Nightmare on Elm Street." It's been a long week already.

The Dow fell a crushing -1161 points, -3.56%, the Nasdaq dumped -566 points or -4.73%. The S&P 500 and Russell 2000 were somewhere in between: -4.03% and -3.54%, respectively. It represents the single-worst trading day since June 2020.

Fed Chair Jay Powell’s tough talk published yesterday by the Wall Street Journal seemed to put a tremor of fear through the markets that has carried all the way through Wednesday. Whether or not he was simply trying to walk back the perceived dovishness of taking a 75-basis-point hike off the table, which he noted at a press conference following this month’s meeting, trepidation over a “hard landing” of the economy has again reared its ugly head.

The Nasdaq is now trading -30% from its all-time highs registered just six months ago. With Big Tech taking another bath today, led by Amazon (AMZN - Free Report) , Tesla (TSLA - Free Report) and Netflix (NFLX - Free Report) -7% or so, the tech-heavy index flirted with a -5% loss for a few minutes this afternoon. All 11 sectors of the S&P closed lower, and this is the first session in the last four that Dow hasn’t closed in the green.

Aside from quarterly Retail sector earnings and opinions from the Fed (other presidents are speaking this week besides Powell), lots of Housing data has hit the tape this week. And here, while homebuilders like D.R. Horton (DHI - Free Report) and PulteGroup (PHM - Free Report) were down -6.7% and -6.3%, respectively, and continue to experience headwinds, we may see a slight silver lining among the storm clouds:

With mortgage applications -12% last week and a record number of building permits not breaking ground into new housing starts last month, we’re starting to see supply-demand mediate a bit. This is essentially a hit to demand that will help bolster supply of homes for sale (even if the homebuilders may have seen the peaks of this cycle already passed), and this would help bring down some of the strain in the housing market, including, over time, supply and labor costs (depending on a few other factors, of course).

If and when that happens, pricing should come down for housing. Couple this with already-expanding mortgage rates based on the Fed hikes (with more to come), and price points will remain elevated for homes, putting more downward pressure on asking prices. Importantly, housing being the single-most expensive thing a person buys, this could have a relatively near-term downward push on inflation metrics overall.

Of course, this wouldn’t make up for food and energy challenges majorly aggravated by the war in Ukraine, and supply-chain issues based on China’s latest self-imposed shutdown upon its latest wave of Covid. Those are global concerns and, it’s worth pointing out, the Fed has nothing to do with either of them. But if the Fed is looking to thread this needle to a soft landing in the economy, which it is, it’s going to need some help from high-ticket items like homes for sale.

Right now, it may feel like the market is pricing in a crash and burn, but really it’s still just a big valuation shake-out. Even in Big Tech, the multiples aren’t completely emaciated; in fact, regardless the industry, 20x forward earnings for globally in-demand companies seems pretty reasonable. The markets are still higher than where they were pre-Covid, although it doesn’t feel like it; we haven’t given away all our pandemic gains — just the past year’s worth or so!

Well, if that’s too much good news for you, Cisco Systems (CSCO - Free Report) posted fiscal Q3 earnings that will cool your jets: earnings of 87 cents per share beat expectations by a penny (although Cisco never misses, so a one-penny beat is about as close as we get), on a revenues miss of about half-a-billion dollars to $12.84 billion for the quarter. But it’s the -1-5% revenue decline expected for Q4 revenues; the Zacks consensus had pegged roughly a +5% gain for the quarter. Cisco shares are hemorrhaging another -14% in late trading.

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