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Why has the market been dropping? The S & P 500 has been down five of the last six trading sessions. On an intraday basis, the top of the market was July 27. The S & P was down 0.6% that day on word that the Bank of Japan was loosening its yield curve control, which meant potentially higher rates in Japan. That was really the start of the current “mini-correction.” .SPX 1M mountain S & P 500 1-month Since then, it’s been one excuse after another. On Tuesday, there was a convenient excuse: the Moody’s downgrade of a few banks . Really? There’s an old saw on Wall Street: Rating agencies are famous for telling you what you already know. We already know what Moody’s was saying about the problem with banks: higher funding costs, potential regulatory issues, and rising risks tied to commercial real estate loans amid weakening demand for office space. We know that. “The Moody’s regional bank downgrade is par for the course. There is nothing new that is not already factored into bank shares,” Mike O’Rourke from Jones Trading said in a note to clients Tuesday night. You can see that in the Regional Banking ETF (KRE) , a basket of large regional banks. It opened down 4%, but buyers quickly came in and ended down less than 1%, where it closed three trading days ago. KRE 5D mountain Regional banks ETF last five days Still, lots of other stuff dropped, with no apparent reason. Buyer’s strike Looking for a macro reason for a sell-off? Hard to find one. China trade data has been weak, but China is now grappling with deflation, not inflation, and overall data in the U.S. has been mostly stellar. CPI inflation year-over-year is at 3.0% (We will get new data this week with economists polled by Dow Jones expecting 3.3%). Consumer confidence hit 71.6 in July (it was as low as 50.0 in June of 2022). Sellers are not panicking yet. The S & P 500 is less than 3% off its highs. “Volumes are seasonally light,” Harry Whitton, who tracks ETF trading volumes at Old Mission, tells me. “People are doing something else besides staring at their brokerage accounts.” Translation: The down market is a buyer’s strike, not people rushing to the doors to sell. We all know the answer to this downdraft. At its current valuation, the market is not offering a good risk/reward. The S & P 500 is still trading at a pricey 19.3 times forward earnings, well above the historic 17 times forward earnings norm. Everything Tuesday was down about 1.0-1.25% midday, including the equal-weight S & P 500 (RSP) the market-cap weighted S & P 500, the Nasdaq 100 (QQQ), and the small-cap Russell 2000, but most ended down a fraction of a percent. Stocks have competition Still, there does seem to be some unwinding of bullish positions. This is what hedge funds call “degrossing,” or reducing exposure across the board. Then there’s the competition for stock investor’s money. At nearly 5% yield, money market funds are still sucking in money, even with the S & P 500 up 18% this year. I mentioned Monday that money market inflows reaccelerated last week: $21 billion worth of inflows were added, according to Goldman Sachs. U.S. money market fund assets hit $6.7 trillion, the highest level in more than 13 years. “The pace of money market flows reflects a larger apathy towards stock,” Todd Sohn from Strategas told clients. This is the opposite of FOMO (Fear of Missing Out). This is Fear of Losing Money Overnight (FOLMO?) “Investor confidence is no longer dismal and broad valuations are no longer cheap,” David Kelly, Chief Global Market Strategist for J.P. Morgan Asset Management, said in a note to clients Tuesday “In this kind of market, courage is less vital and looking carefully at valuations becomes much more important.”
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