VIDEO: Market Meltdown Ahead?

Welcome to my latest video presentation. Below is a condensed transcript; you’ll find additional charts and details in the video.

Just how severe will the stock market slump get? Is the worst behind us, or…is the worst yet to come? Does the recent pullback portend a prolonged bear market? Let’s conduct a risk assessment, by looking at the positives and negatives underlying the market.

Several readers have asked me if now’s a good time to go bargain hunting, especially in the battered technology sector. Problem is, stocks might not have bottomed yet. And trying to time the market is a fool’s game.

If you’re unnerved, I don’t blame you. Investors have been subjected to a wild ride of sharp ups and downs. The combination of Federal Reserve tightening, rising inflation, and the increasingly bloody Russia-Ukraine war has weighed on the stock market.

The tech-heavy NASDAQ is in bear territory. The S&P 500 is in correction mode, with the Dow Jones Industrial Average not far behind.

The S&P 500 logged its fifth straight week of losses, the index’s longest losing streak since 2011. The benchmark 10-year Treasury yield surpassed 3.1%, the highest since 2018 (see chart).

Crude oil prices have resumed their ascendancy, as Western sanctions against Russia and supply disruptions continue. Helping drive crude prices higher is expanding Chinese fuel demand, despite strict COVID-induced quarantines and the country’s mixed economic data for April.

The major industrial city of Shanghai remains in lockdown, but the rate of infections is starting to wane, which is good news for China’s economy and hence for oil demand. The energy sector led all 11 S&P 500 sectors last week, with a 10% gain.

The Fed tightens the vise…

The Federal Reserve last week announced a hike in interest rates by 0.5%, the biggest increase in 22 years. The Fed’s Open Market Committee said in its May statement last Wednesday: “The Committee is highly attentive to inflation risks.”

Stoking those inflation risks has been a greatly improving jobs market. The Labor Department reported last Friday that total nonfarm payroll employment increased by 428,000 in April, versus 380,000 expected.

Jobs growth in April was widespread, led by gains in leisure and hospitality, in manufacturing, and in transportation and warehousing. Over the past 12 months, average hourly earnings have increased by 5.5%. That said, the Consumer Price Index (CPI) increased 8.5% for the year ended March 2022, which means wage growth is falling behind inflation.

Is a full-blown stock market crash waiting around the corner? Perhaps, but I think strength in the jobs market, together with healthy corporate earnings growth, will provide a floor under stocks.

According to FactSet (as of May 6), 87% of S&P 500 companies have reported actual operating results for the first quarter of 2022. Among these companies, 79% have reported actual earnings per share (EPS) above estimates, which is above the five-year average of 77%.

The blended EPS growth rate for the first quarter is 9.1% today, compared to an EPS growth rate of 7.0% last week and an earnings growth rate of 4.6% at the end of the first quarter (March 31). “Blended” combines actual results for companies that have reported and estimated results for companies that have yet to report.

As long as earnings, jobs and the economy continue to expand, stocks should find sufficient traction to avoid a meltdown. The real test will come with April’s CPI report, due for release Wednesday, May 11. If the CPI numbers come it hotter than expected, all bets are off.

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John Persinos is the editorial director of Investing Daily.

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