Stock investors have enjoyed good times over the last year, with the S&P 500 soaring 23%, far above the average annual increase of 10% over the last 40 years.
Stocks benefited last year from expectations that the Federal Reserve would cut interest rates multiple times this year.
But optimism about rate cuts has deflated, with the economy expanding at an annualized 3.4% rate in the fourth quarter, and stubborn inflation at 3.5% year-on-year in March.
Interest-rate futures positions indicate an 80% chance of two rate cuts or less, according to CME's FedWatch Tool.
Harvard economist and former Treasury Secretary Larry Summers even sees a 15% to 25% probability that the Fed will increase rates this year.
Related: Ex-Treasury official unveils startling interest rate outlook
Given the altered interest-rate terrain, it’s now up to the strong economy to support stock gains. To be sure, the Atlanta Fed GDPNow forecast tool does see a deceleration to 2.8% growth in the first quarter, but that’s still a buoyant number.
Investors expect that economic strength to boost earnings. Analysts predict S&P 500 earnings will show a gain of 0.9% in the first quarter from a year earlier, according to FactSet. That would represent the third straight quarter of growth.
Earnings season kicked off on April 12, with major banks showing mixed results.
Fund manager Doug Kass’ warning on stocks
The market rally has sent stock valuations above historical levels. The forward price-earnings ratio for the S&P 500 stood at 20.6 on April 12, according to FactSet, topping the five-year average of 19.1 and the 10-year average of 17.8.
Related: Analyst overhauls S&P 500 target ahead of earnings season
To some experts, that’s a sign that stocks are overbought. One bear is TheStreet Pro’s Doug Kass, a hedge fund manager whose career stretches back to the 1970s, including a stint as Director of Research for Leon Cooperman's Omega Advisors.
He has cited several negative factors for stocks, including:
- Geopolitical tension in the Mideast.
- The likelihood of higher interest rates for longer.
- Accumulating signs of “slugflation” (sticky inflation, slowing economic growth, and corporate profits).
- Investor sentiment has moved to a bullish extreme.
Helene Meisler’s technical take on stocks
Veteran technical equity analyst Helene Meisler of TheStreet.com Pro anticipates a short-term technical rally for stocks this week, followed by a decline.
Related: How long will the S&P 500 slide last?
Meisler has used technical analysis to evaluate stocks and markets since the 1980s, when she worked at Cowen & Company, and later, as the first technical analyst hired by Goldman Sachs.
The market is stagnating now, she wrote. Many stocks made their highs in December. The Nasdaq Composite index hasn’t moved much since late February, and the S&P 500 has remained little changed since March 1.
Meanwhile, the Dow Jones Industrial Average has returned only 1% year to date. It fell in eight of the nine trading days through Friday. “On a short-term basis it is oversold, or pretty darn close to it,” Meisler said.
And things are worse for the Russell 2000 index of small-cap stocks, which has slumped 6% this month. “If the Russell is in a bull market, it’s surely doing a great job of pretending it’s not,” Meisler said.
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All that argues for a brief rebound, she said.
“So why should we even get a rally?” Meisler asked rhetorically. “Well, Friday [April 12] saw 92% of the volume on the downside. That’s a little panicky.”
Meisler believes that tracking the percentage of up or down-day volume offers clues to when investors are too greedy or fearful. When stocks are near either extreme, they are likely to reverse direction.
So, why won’t the rebound last?
She says the advance-decline line over a rolling 10-day period is oversold, but a longer-term measure over the past 30 days is not.
“Intermediate-term indicators are not oversold,” she said.
Sentiment indicators will “start moving down from their too bullish views when they are released this week,” Meisler said.
“But none are anywhere near the sort of sentiment we typically get at an intermediate-term low. So if I am correct and we do get a short-term rally this week, I would then expect it to come back down.”
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