Here’s an old Wall Street saw: Corrections happen when people are worried about something. Bear markets happen when there is really something to worry about. We are in the former, not the latter. Investors are worried, but there is not yet a lot to worry about. The S & P 500 is down in nine of the past 11 days, but it is still only 3.2% off its recent 52-week closing high of 4,588 from July 31. There were much bigger drawdowns earlier this year: The S & P 500 dropped about 8% from early February to mid-March of this year before and during the failure of Silicon Valley Bank. Hiccup in soft landing story Why are we hitting this string of down days? There’s a hiccup in the soft landing story. The soft landing is the prevailing view in the market. It holds that job growth will slow modestly, that inflation will moderate toward the 2% Federal Reserve target and the Fed is mostly done raising rates. But rates have been rising recently on stronger economic data such as Tuesday’s retail sales for July, causing some to worry that the Fed will be forced to keep rates higher for longer, or even hike rates more than expected. Ten-year Treasury yields were at 4.21% yesterday, hovering near the highest levels since October of last year, which were the highest levels since 2007. That’s causing a speed bump for stocks, particularly tech stocks, which are underperforming this month and this quarter. While prices are certainly fluttering — the Nasdaq is more than 5% off its recent high — you’d be hard pressed to find obvious signs of panic in the market internals. Volumes are not yet heavy, indicating the problem is a lack of buying interest, not sellers looking to get out. Exchange-traded funds flows have been modest. Some outflows were noted last week in the iShares 20+ Year Treasury Bond ETF , but there have still been inflows into short-term Treasurys and money market funds. Volatility is muted: The CBOE Volatility Index (VIX) is at 16 and has been below 20, its historic average, since the end of March. Despite poor economic news out of China, the macroeconomic environment in the U.S. remains strong and still supportive of a soft landing. Indeed, if anything, the problem is the market is demanding Goldilocks economic numbers, and some of the recent data is a bit on the hot side. Bottom line: So far, this is a garden variety market correction. Correction or not, the timing is bad The problem is the timing is not good. Earnings season is over, we are in a seasonally light period for news and a seasonally weak period — August to October — for stocks. At 19.2 times forward earnings, the S & P 500 is still richly valued. The lack of issues to focus on means that the Federal Reserve Bank of Kansas City’s annual gathering in Jackson Hole, Wyoming, next week will be the primary short-term focus for traders. This will inevitably lead to more over analysis about the “yield problem.” The best advice I have heard about this comes from Phil Camporeale of JP Morgan Asset Management: Try to keep it in focus. “This is a high-class problem, because the growth story is very, very different than it was last year when inflation was between six and eight percent,” he said on air on CNBC last night.
