Chart of the Day - what is driving the market
I want to build on my post from yesterday where I suggested the Fed may be out of play for now and what matters is the economy in general and earnings in particular.

The Fed matters. As I showed in the comments yesterday, every recession has been preceded by a Fed hiking cycle. Perhaps this hiking cycle will not lead to recession. It has happened. 3 times out of 14. Not impossible. Possibly unlikely though.

Last year, the Fed was ALL that mattered. The market moved on expectations and reality of Fed action. It moved higher on expected Fed pivots. It moved lower on actual Fed hawkishness. Peak Fed was one of the Twin Peaks I have discussed.

You can see this play out in the chart today. The purple line is the 10-year yield, which is just an accumulation of expected Fed policy for the next 10 years. As these rates moved higher (inverse here so lower), the market multiple, the forward P/E in orange moved lower.

The blue line is the actual SPX moves. These moves in blue were entirely driven by the changes in forward multiples. A multiple is a measure of investor sentiment. Tighter expected policy dampened sentiment and drove stocks lower. Easier expected policy was the opposite.

You see earnings in white. These actually were still moving higher as the market moved lower. How can that be? Earnings are a lagging. Remember HOPE - housing, orders, profits and employment.

Now, however, with Fed expected to slow, pause, stop or reverse, it is not the major theme. The major theme now, as we saw the last 2 days, is the economy. The economy drives earnings and earnings drive stocks over the long haul.

You see the white line which is actual quarterly earnings finally succumbing. The news this quarter has been far more downbeat than previous quarters. Earnings are expected to fall, certainly by the bears. Bulls think they can hold up.

In a higher for long rate scenario - a flat line - there probably wont be a big move in the multiple. Simplistically, P = P/E * E. If P/E is flat and E is falling where does P go? If you expect a higher P, you must be expected a higher E.

We get a few more weeks of earnings. The early results aren't great. We need to keep watching and listening.

We need to ... Stay Vigilant

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Nathan Worden's avatar
All eyes on earnings :)



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