Wall Street not yet buying the dip as S&P 500 enters bear market

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Yahoo Finance’s Emily McCormick joins the Live show to discuss Wall Street’s response to bear market concerns.

Video Transcript

Markets certainly watching for the potential of a larger interest rate hike from the Fed as it tries to address rising inflation. But Wall Street analysts are holding on their calls to buy the dip. We’ve got Yahoo Finance’s Emily McCormick here at the desk. What to buy?

EMILY MCCORMICK: Well, Akiko, what to buy, what not to buy is really what Wall Street analysts are saying at this point. Wall Street firms are really stepping away from this notion, this advice of buying the dip at this particular juncture. Now, this is a big departure from that time-honored strategy that investors as recently as last year had really been successfully employing.

If we think about the fact that if you bought that dip, that March 23, 2020 low just a couple of years ago, at the height of the pandemic, and held on to it through the market peak of January 3rd this year, you’d be up by 114%. And yet, with this particular dip and the declines even that we saw yesterday, this decline of 22% now that we’re seeing on the S&P 500 from that January 3rd high, Wall Street is saying that it’s probably too early to really be stepping into this market.

Now, in terms of the case for staying on the sidelines here, do want to highlight three key points from strategists over at BlackRock. Now, first, they argue that earnings estimates are still too optimistic and that markets haven’t fully priced in this impact that inflation is going to be having on company profits. So when we think about the impact that rising labor costs, that rising input costs are going to be having on corporate earnings, that still needs to get reflected into these markets.

Now, second, BlackRock said that stocks still aren’t cheap even with these year-to-date declines. When you think about the fact that the Fed is raising rates now potentially by 75 basis points tomorrow, that cost of capital, so that key input when it comes to valuing stocks, is going to continue moving higher. And that’s going to keep weighing on valuations.

And then third, BlackRock also argued that the risk that the Fed actually overtightens has risen. Now, importantly, right now markets are really in limbo, trying to figure out how much economic activity is going to be impacted by this tightening by the Federal Reserve. So BlackRock is saying that until the Fed acknowledges explicitly that there is going to be this high cost to growth as they tighten, we are going to likely see stocks being range-bound, and that there’s going to be a cap on where equities can go from here.

Now, Emily, you captured all of this really well in the morning brief. The word capitulation showed up in your brief. And that’s a word that a lot of people have been talking about within the context of can we find the bottom here. Are you starting to see signs of asset allocation that might show you, OK, this is capitulation? What are you hearing on that front?

EMILY MCCORMICK: Yeah, well, if we take a look at some of the signs of capitulation, I think Dave Lutz over at Jones Trading really laid out a list of a number of points that signal capitulation, where there is this mass selling, the fact that all the speculators have been wiped out. And some of those signs are starting to flash yes, but some of the key factors are still saying no. And one of the ones that Dave Lutz highlighted was the fact that we haven’t taken out the high for the year and from the time of Russia’s invasion of Ukraine on the VIX.

So the CBOE Volatility Index, that’s, of course, the metric that really captures the implied 30-day market volatility there in the stock market, and we haven’t necessarily seen the VIX rise above that 38 level, which is around the high that we saw for the year-to-date and in February. So until we get that and a couple of other signs, potentially sign here that we still have a ways to go on the downside in these markets.

Yahoo Finance’s Emily McCormick, thanks so much. Appreciate it.