Bulls finding it's tough to buy the dip until there are signs inflation is getting under control

Published Mon, May 9 20229:36 AM EDT

When you look at what the market is grappling with, it's remarkable the S & P 500 is only down 14% for the year. Consider that: 1) the Federal Reserve and inflation are threatening the U.S. economy and stock market, 2) the Russia-Ukraine war is threatening the European economy and global commodities like oil, wheat, and corn, and 3) the Covid lockdowns in China are threatening the Chinese economy. In other words, there are three separate threats to the three largest economic areas in the world. The Russia-Ukraine war is not improving, and China appears to be tightening its Covid lockdown. As for the Fed and inflation, the bulls are going to have a tough time arguing it's safe to buy the dip until there are clear signs that inflation is getting under control. It's early, but bulls were heartened on Friday when Cox Automotive said its Manheim Used Vehicle Value Index — which tracks prices of used vehicles sold at its U.S. wholesale auctions — declined 1% in April from March, marking the third straight month of declines from the first month of the year. It's still up 14% from a year ago, but at least it's declining and it's one data point for the bulls. A much bigger one will come Wednesday at 8:30 a.m. ET with April CPI. Headline inflation is still expected in the 8% range (it was 8.5% year over year in March), but at least it's not expected to go higher. Regardless, a couple of data points will not change the Fed's mind. Chairman Jerome Powell made it clear that they will push ahead with their rate increases until there is a clear and persistent trend in their favor. Until that trend emerges, any argument that "stocks are cheap" sounds hollow. I've noted the dramatic multiple compression some high quality tech names have already seen (AMD, Nvidia, for example), not to mention the drubbing that companies with little or no profits have taken, even though revenues continue to improve. Indeed, Ark Invest's Cathie Wood loudly proclaimed at the recent Exchange ETF conference in Miami Beach that most of her companies would see revenues increase 50% this year. That may be true, but it's not about revenues this year. It's about multiple compression, and what happens to companies with little or no profits in a rising interest rate environment that may also be seeing an economic slowdown.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, May 3, 2022.

Brendan McDermid | Reuters

When you look at what the market is grappling with, it's remarkable the S&P 500 is only down 14% for the year.