When you follow the stock market, it is easy to get swept away by the daily drama of 24/7 financial news.
Every piece of news, every data point, and every market move is dissected and debated and takes on often unwarranted significance as a result.
I do understand the irony of me pointing that out, given we are a part of that media circus.
That makes me more prone to exaggerate the importance of the day-to-day in my own mind, and makes me more aware of the importance of occasionally zooming out and looking at the big picture.
When you do that with the stock market right now, you see a market that is sitting on the fence, waiting for something to tip it over.
If you check the price history of the S&P 500, you’ll find that the index has swung wildly over the last year or so, but it is not much different from where it was a year ago (-5.4%).
The same applies more recently too, with the index bouncing around like a ping-pong ball in a 3750-4200 range since early November.
It should also be noted that current levels are neutral, in that we are sitting around the middle of that range.
The price picture is one of a lot of noise, but with very little actual impact.
That view is reinforced when you look beyond the chart at the fundamental picture, but there is a silver lining than some might expect.
The S&P 500 may look like it has been on a roller coaster ride over the last year, but when you zoom out, you’ll see that it has barely moved.
The index is down only 5% from a year ago, but there is more to this story than meets the eye.
The average P/E of the index, which measures how much investors are willing to pay for each dollar of earnings, has dropped by a whopping 26.5%.
A year ago, it stood at 24.21, and now it is at 17.81.
What does this mean?
It means that stocks have become cheaper relative to their earnings, which have grown despite the pandemic. It also means that we are close to the long-term average for P/E ratios after being above it for a while1. This suggests that stocks are fairly valued right now, and not overpriced as some might fear. Of course, this could change if earnings collapse due to higher interest rates or inflation.
But don’t hold your breath for that.
Fed Chairman Jerome Powell told Congress this week that rates will stay higher for longer, and traders rushed to the exits after his comments.
Later, we will get some important data on jobs and inflation, but don’t let them distract you from the big picture.
It may be some good news that will make the traders run back for more(pain?).
Just remember that one month’s numbers won’t make or break the market.
The bottom line is this: The stock market is on pause right now, waiting for a clear direction.
But don’t let that fool you into thinking that nothing is happening behind the scenes.
There is always something happening in the market; you just need to know where to look.
Stocks are not overvalued or undervalued right now, but are fairly valued. Their P/E ratio is around the average, reflecting higher earnings rather than lower prices.
The question is whether the economy can handle the rate hikes and cool down gradually without plunging into a recession.
That depends on more than just one month’s data, no matter how important they may seem at the moment of release. So investors should not panic or celebrate as the reports come in.
Instead, they should keep their eyes on the big picture and remember that the market is always moving, even when it seems to be standing still.
There are opportunities and risks everywhere; you just need to know where to look.
And that’s what we at Traders on Trend are here for: to help you navigate the market with clarity and confidence.
For More Stocks And Investment Related News, Click Here.
