With the markets taking the day off in celebration of the new Juneteenth holiday — America’s official freedom from slavery, which took place June 19, 1865 — we have a chance to reflect on the stock market. That’s pretty tough after a week like the one we just had: despite the point-and-a-half gain on the tech-heavy Nasdaq Friday, the equities market looks like it’s in embers.
All four major indices are down over the past five trading days, from the Nasdaq -1.7% to the small-cap Russell 2000 -4.1%. In the past month, the Russell is also the worst performing at -6%, followed by the S&P 500 at -5.8%. But it’s still the Nasdaq that’s done worst year-to-date: -31.8%; the Dow has outperformed the major indices since the start of the year, “only” down -18.3%.
Threading the needle to a “soft landing” economy — quelling inflation without sinking the U.S. into recession — is a precarious and imperfect business, and the last month or so has shown us the enormous levels of worry market participants heap onto themselves as they try to make sense of what may be around the corner. It’s been more than 40 years since the country has faced such challenges, and we don’t like them now every bit as much as we didn’t like them then.
Our Fed funds interest rate doubled last week to a range of 1.5-1.75% — still historically low, but bringing us into an environment we’ve not dealt with since prior to the pandemic. The median estimate from Fed members where we’ll be on interest rates more than doubles from here: 3.8%, which is a level we’d not reached since prior to the Great Recession which began in 2008.
While we’re already seeing higher prices leading to “demand destruction” in certain industries, such as Housing, the fact of the matter is there is only a finite number of high-priced goods and services that can be avoided by consumers. Oil fuel prices look to remain very high as long as the West’s Russian embargo continues, and as long as we run our cars and trucks on gasoline, this will remain not only a higher chunk of household income spent, but will affect Transportation and goods that come along with it.
What does all this mean for equities going forward? Well, forward price-to-earnings (P/E) metrics have largely come down to much more reasonable levels; even a high-P/E company like
Tesla ( TSLA Quick Quote TSLA - Free Report) is down beneath 60x, while NVIDIA ( NVDA Quick Quote NVDA - Free Report) is 29, ADM ( ADM Quick Quote ADM - Free Report) 12, JPMorgan ( JPM Quick Quote JPM - Free Report) 10 and AT&T ( T Quick Quote T - Free Report) 7.6x forward earnings. These are quite low historically, and very low relative to where they were just last Thanksgiving.
That said, the intimidation factor is strong right now: the bears have seized control of daily trading activities to such an extent, would-be buyers at lower valuations are still keeping far away. One day last week showed an extraordinary 98% downward bias on trading activity. We hope some of this post-Fed dust has settled for the remainder of this week and stock buyers find their way back into great companies at very inexpensive prices.
Juneteenth is obviously a holiday for reflecting on many aspects of the American experience — bringing about the end to the slave trade is one of the most important and consequential events in U.S. history. But as it grants us a moment to look around our investment terrain, we hopefully will reflect for the better in the stock market from here.