Wednesday's Market Minute: Beware Panic-Selling if Economic Data Miss

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Stocks are really getting hit now. The Nasdaq-100 snapped through its long-term uptrend with conviction yesterday, and the Russell 2000 slipped below a level that’s held for a year running. The levees are breaking.

The good news is that the stock market is not the economy. In fact, right now the two appear to be quite opposed. Much of the recent volatility in equities stems from the bond market as Treasury yields rip higher. It’s happening partly because inflation is problematic enough to force the Fed’s hand, but that’s still mostly the result of elevated consumer demand and a consistent employment trajectory for the U.S. economy. Yes, there are supply-chain complications, but they seem to be lessening.

As we learn to live with the least-deadly version of the virus yet, investors are rotating out of winning tech trades that dominated the quarantine era. These two forces behind the sell-off – rising rates and momentum reversal in Lockdown Winners – are two distinct effects of the same truth: things are getting better.

Framed that way, there’s little reason to panic about what this stock volatility implies about the economy. But there could be plenty of reason to panic about your portfolio if it’s levered to speculative, expensive stocks. The median price to sales ratio in the S&P 500 is the highest in history. Microsoft lost two-thirds of its value when the dot-com bubble burst. We could possibly see a bunch of publicly traded stocks disappear without reflecting a commensurate collapse in the economy.

But just how strong is our economy? The latest economic data are starting to get worrisome. Data are missing economists’ expectations again for the first time in months, and Tuesday’s shock decline in New York’s manufacturing survey is alarming. Services data and the topline employment number also missed this month, and consumer figures in retail sales and sentiment are ebbing.

Hiking interest rates into a firm economy with high inflation is one thing; hiking into a slowing economy with high inflation could be a disaster. Right now, it’s still very reasonable to spin a positive narrative on what’s happening in stocks, but if upcoming housing data or jobless claims disappoint, we could see full-blown panic.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.