Any Way You Slice It, Stocks Still Don’t Look Cheap

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Stock indexes closed another losing week in a downbeat February, as investors continue to debate the path of the economy and monetary policy. It’s a decidedly muddled outlook for the market from a fundamental perspective, with an equal amount of data on the bullish and bearish sides of the ledger.

Information can be interpreted as good news or bad news, depending on one’s proclivities and time frame—a stronger economy now could just mean more Fed tightening and a harder fall into recession later, after all.

It’s a dynamic that Truist Advisory Services Co-Chief Investment Officer Keith Lerner calls the “reverse Tepper trade,” referring to a bullish prediction made by hedge fund manager David Tepper in 2010 that the economy would improve or the Fed would ease, boosting the market either way.

Today, the choice is between a weaker economy that brings down inflation but also hits corporate profits, dragging down asset prices, or a stronger economy that forces the Fed to tighten even more to tame inflation, also dragging down asset prices.

This past week’s numbers gave investors plenty to fret about: Purchasing managers’ indexes came in stronger than expected, personal income and spending surged in January, consumer sentiment rose to its highest reading in more than a year, and Friday-morning data showed hotter-than-expected January core inflation and an upward revision to the December figure.

The

Dow Jones Industrial Average
lost ground for a fourth straight week, falling 2.99%. The

Nasdaq Composite
slid 3.33%, and the

S&P 500
fell 2.67%.

Without the weight of fundamental evidence in one direction or the other, it pays to check what the charts are saying. The S&P 500 stormed out of the gate in 2023, rising nearly 9% in January and notching a 17% gain from its mid-October low. That coincided with a decline in bond yields as traders bet on a quicker end to rate hikes.

Since then, jobs and inflation have come in hot, and bond yields have resumed their climb. The S&P 500 is down more than 5% in February, closing Friday at 3970, just above its 200-day moving average of about 3940—a key technical level that can act as support or resistance in a rally or downturn. A break below that would put the next support level around 3800, says Lerner, a chartered market technician.

The S&P 500’s 5% pullback over the past month still leaves it with a multiple of about 17.5 times forward earnings. The year-to-date rally has been driven entirely by valuation expansion, with forecasted profits down over the same span. That multiple is about equal to its average over the past decade, but with considerably more uncertainty—and higher interest rates—today.

The technical uptrend in the 10-year Treasury note’s yield remains intact. At 3.95% Friday, it has bounced off its 200-day moving average twice early in 2023, and could soon retest its October high of 4.23%, Lerner says. That would only add to the valuation pressure on stocks.

The fundamentals and technicals seem to agree: At current levels, the S&P 500 simply isn’t that compelling. There might be better value down the market-cap scale, where small- and mid-cap indexes are still above their 50-day moving averages and valuations are cheaper.

Write to Nicholas Jasinski at [email protected]