There's a general sentiment that while there are challenges, especially with rising interest rates and high valuations, the underlying strength in productivity and potential for earnings growth can provide support to the market.
- Inflation and Productivity: There's a belief that despite strong data, inflation won't be a significant concern. This is attributed to a significant bounce-back in productivity. High productivity can act as a deflationary force, offsetting inflationary pressures.
Translation: Higher Productivity Tames Inflation Pressure
- Wage Growth: While there's a tight labor market pressuring wage growth, the increase in productivity justifies higher wages. Workers have fallen behind in real wages since the pandemic, and there's a call for them to catch up, especially in sectors like the auto industry.
Translation: Higher Wages are positive for the economy if Workers produce more
- Interest Rates and the Stock Market: Real interest rates are closely linked to real GDP growth. If real GDP grows, real interest rates will rise, leading to higher nominal rates. However, if productivity and real growth increase profits, this can support stock prices even in the face of rising rates.
Translation: It's actually positive if rates are rising because of higher growth and higher expected profits versus higher inflation.
- Market Correction: There's a belief that the market correction isn't over due to various factors, including seasonality (September being a historically weak month), negative momentum, and a significant number of stocks trading below their 50-day moving average.
Translation: The Market is due for a pullback, which is normal
- Change in Market Mentality: The market has shifted from a "buy the dip" to a "sell the rip" mentality. This is seen as a tactical move, and long-term investors should remain focused on their strategies.
Translation: Correction means opportunity for long-term investors
- Role of Mega Caps: Mega caps, especially in technology, have been market leaders. Their underperformance can drag the market down, especially during historically weak periods.
Translation: Mega caps led the rally, it makes sense they lead the correction.
- Perspective on Corrections: The current market correction is viewed differently from the one in 2022. The current correction is attributed to concerns about yields and valuations, not growth fears. In 2022, the concerns were about declining EPS revisions and weak GDP growth.
Translation: The correction is about higher borrowing costs which is much less scary than falling growth.
- Earnings and Valuations: The market's move this year has been driven by multiple expansion in anticipation of a better earnings environment. Despite various economic challenges, earnings estimates have remained static, making the market susceptible to moves in yields.
Translation: The Market was right about better-than-feared earnings; however, it still needs to price in higher yields (borrowing costs).Are you Buying the DIP? or Selling the Rip? - STAY BLESSED