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Black Monday 2.0? Clues to Help Investors' Navigate the Market's Next Move
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Inflation numbers are turning out to be more stubborn than most investors thought, and in turn, the US Federal Reserve is keeping its “Hawkish” stance, meaning higher rates for longer. Meanwhile, the War in Ukraine drags on, while the war in the Middle East in the Gaza Strip between Hamas and Israel seems to be escalating more with each day in passing. However, as experienced investors understand, stocks tend to climb a “Wall of Worry.” Are stocks set for another 1987-style “Black Monday” where the S&P 500 Index crashed 20% in a single session, or will they climb the Wall of Worry and rally into year-end? Below are 3 clues that will help investors determine the market’s next move:
A Stabilization in Bonds
When the bond market is falling, it means bond prices are decreasing, and yields (interest rates) are rising. Rising yields can offer more attractive returns for investors than stocks, increase the cost of borrowing for companies, and cause the “discount rate effect” (That is, future earnings are worth less in present terms because the value of a stock is often calculated based on its future earnings, discounted back to the current value). While there is not yet proof of a reversal in bonds, the IShares 20+ Year Treasury Bond ETF ((TLT - Free Report) ) is at max oversold levels (usually leads to a bottom or at least a bounce. Furthermore, Bill Ackman, a billionaire hedge fund manager, announced via social media that he covered his bond short bet.
Image Source: TradingView
Strong Seasonality Mixed with Poor Sentiment
As we have mentioned all year, historical seasonality trends have played out perfectly in 2023. With that in mind, November and December of the pre-presidential cycle (like we are now) are some of the strongest months in the entire presidential cycle.
Image Source: Carson Research
Meanwhile, according to sentiment measures such as the CNN Fear & Greed Index, fear is hovering around the most extreme levels of 2023. Meanwhile, another sign of pessimistic sentiment flashed over the weekend when the term “Black Monday” trended on Twitter.
Image Source: X.com
Investors must consider that the thing about Black Monday was that no one expected it in real-time (outside of Paul Tudor Jones, who became a billionaire). Would it happen again at a time when everyone expects it?
Big Tech Earnings
Equities are approaching the heart of earnings season. Earnings from “Magnificent 7” components such as Microsoft ((MSFT - Free Report) ),Alphabet ((GOOGL - Free Report) ), and Amazon ((AMZN - Free Report) ) are due this week. These earnings are likely critical to market direction because these three companies alone account for trillions in market cap alone. Furthermore, mega-cap tech stocks have driven the bulk of equity performance in 2023. For example, the Nasdaq 100 ETF ((QQQ - Free Report) ) is up 35%, while the Equal Weighted Nasdaq 100 ETF ((QQQE - Free Report) ) is only up 15%. You can access a full earnings calendar here.
Bottom Line
US equities near an inflection point as fear, uncertainty, and doubt creep into investors’ minds. Investors should consider 3 critical clues: the stabilizations of bonds, historical seasonality trends combined with poor sentiment, and earnings from major tech companies like Microsoft.
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Black Monday 2.0? Clues to Help Investors' Navigate the Market's Next Move
Inflation numbers are turning out to be more stubborn than most investors thought, and in turn, the US Federal Reserve is keeping its “Hawkish” stance, meaning higher rates for longer. Meanwhile, the War in Ukraine drags on, while the war in the Middle East in the Gaza Strip between Hamas and Israel seems to be escalating more with each day in passing. However, as experienced investors understand, stocks tend to climb a “Wall of Worry.” Are stocks set for another 1987-style “Black Monday” where the S&P 500 Index crashed 20% in a single session, or will they climb the Wall of Worry and rally into year-end? Below are 3 clues that will help investors determine the market’s next move:
A Stabilization in Bonds
When the bond market is falling, it means bond prices are decreasing, and yields (interest rates) are rising. Rising yields can offer more attractive returns for investors than stocks, increase the cost of borrowing for companies, and cause the “discount rate effect” (That is, future earnings are worth less in present terms because the value of a stock is often calculated based on its future earnings, discounted back to the current value). While there is not yet proof of a reversal in bonds, the IShares 20+ Year Treasury Bond ETF ((TLT - Free Report) ) is at max oversold levels (usually leads to a bottom or at least a bounce. Furthermore, Bill Ackman, a billionaire hedge fund manager, announced via social media that he covered his bond short bet.
Image Source: TradingView
Strong Seasonality Mixed with Poor Sentiment
As we have mentioned all year, historical seasonality trends have played out perfectly in 2023. With that in mind, November and December of the pre-presidential cycle (like we are now) are some of the strongest months in the entire presidential cycle.
Image Source: Carson Research
Meanwhile, according to sentiment measures such as the CNN Fear & Greed Index, fear is hovering around the most extreme levels of 2023. Meanwhile, another sign of pessimistic sentiment flashed over the weekend when the term “Black Monday” trended on Twitter.
Image Source: X.com
Investors must consider that the thing about Black Monday was that no one expected it in real-time (outside of Paul Tudor Jones, who became a billionaire). Would it happen again at a time when everyone expects it?
Big Tech Earnings
Equities are approaching the heart of earnings season. Earnings from “Magnificent 7” components such as Microsoft ((MSFT - Free Report) ), Alphabet ((GOOGL - Free Report) ), and Amazon ((AMZN - Free Report) ) are due this week. These earnings are likely critical to market direction because these three companies alone account for trillions in market cap alone. Furthermore, mega-cap tech stocks have driven the bulk of equity performance in 2023. For example, the Nasdaq 100 ETF ((QQQ - Free Report) ) is up 35%, while the Equal Weighted Nasdaq 100 ETF ((QQQE - Free Report) ) is only up 15%. You can access a full earnings calendar here.
Bottom Line
US equities near an inflection point as fear, uncertainty, and doubt creep into investors’ minds. Investors should consider 3 critical clues: the stabilizations of bonds, historical seasonality trends combined with poor sentiment, and earnings from major tech companies like Microsoft.