The March stock market outlook as the S&P 500 loses momentum after strong 2023 start

Published Wed, Mar 1 20238:19 AM EST

The stock market needs a dose of caffeine and vitamins. What a lousy close to the month. The S & P 500 ended right at the closing low for February, down 2.6%. Like the end of December, traders ended the month in a bearish mood. .SPX 6M mountain S & P 500, 6-months So what's likely to happen in March? With so much negative sentiment, the "pain trade" (the trade that would cause the greatest discomfort to the largest group of traders) is for the markets to rise. What's wrong with stocks? The problems are both fundamental and technical. On the technical side, not a single sector in the S & P is showing any momentum at all. Not one. Not growth sectors like technology or communication services. Not defensive sectors like consumer staples, or health care, or utilities. Commodity sectors like energy and materials? Nothing. That is causing active traders like Commodity Trading Advisors (CTAs) to lighten up. "In terms of CTAs, they are in sell mode right now based on the price momentum triggers," Eric Johnston from Cantor Fitzgerald told me. On the fundamental side, it's pretty simple: We better start getting some better inflation news or earnings are in trouble, again. "Data points continue to show inflation no longer moving down, European CPIs hot, and result of all this is higher global yields which are bad for equities and their valuations," Eric Johnston from Cantor Fitzgerald told me. Recall that since December, analysts have been adjusting 2023 earnings estimates downward to account for a "no landing scenario." From nearly 5% earnings growth expected, we are now down to 1.7% and seem clearly heading for a zero: 2023 earnings estimates: a slow descent (S & P 500) Today: up 1.7% Feb. 1: up 2.3% Jan. 1: up 4.4% Dec. 1: up 4.9% Source: Refinitiv Still the pace of decline has slowed recently. That may now change. The decline in earnings estimates, of course, only makes the stock market pricier. Even with the decline in February, the S & P 500 is currently trading for nearly 18 times 2023 earnings. Seventeen is the historic norm, and the S & P rarely trades above 18 times forward earnings for any length of time, and certainly not with a recession. In other words, even at these levels, you have to believe in the rosy "no landing" scenario, which is a little hard to swallow for a lot of traders. "Valuations that made sense at the start of the month no longer do," Steve Sosnick from Interactive Brokers told me. The pain trade may come into play again Which gets me back to one of my favorite subjects, the pain trade. Sentiment now is like the end of December: very bearish. And that presents a potential opportunity. "I think that large accounts have de-risked sufficiently for their taste right now," Sosnick told me. "They're not clamoring for protection against relatively modest moves, which is why we see VIX mired in the 18-22 range." This makes some sense, but the "inflation returning" story makes a bounce very problematic. Without better inflation numbers, bumping along the bottom seems the best anyone can expect. For the first six weeks of the year, the narrative "Lower inflation, moderating rates = earnings will stabilize" held sway. But in the last few weeks, with the inflation reports we have been getting, that paradigm is changing to "Higher inflation, higher rates = lower earnings." And that's where we find ourselves on the first day of March. Even though February ended on a lousy note, the S & P 500 is still up 3.4% for the year. Given the absolute giddiness around short-term Treasury yields that are near 5% (I mentioned this week that even my mother wanted to buy 2-year Treasuries), that's not such a bad outcome.