Resources and Links
Pixabay
https://www.currentmarketvaluation.com/models/s&p500-mean-reversion.php
https://www.barrons.com/articles/bitcoin-ether-crypto-prices-federal-reserve-51651230843?tesla=y
The S&P 500 fell to 4,200 after a brutal week. The major index fell 5.3%, marking the worst month for this index since the pandemic crash of March 2020. Global instability, interest rate risk, the threat of supply chain issues and inflation have put pressure on stocks worldwide. Will the S&P 500 index revert to its mean return after an amazing performance in 2021 soon, or will we keep on trucking?
The S&P 500 index returned 30% in 2021, and recovered nicely in 2020. A concerning metric is the P/E ratio of the index, which is 52% above its historical average. The current P/E ratio is approximately 22, which signals that stocks in the index are overbought and overvalued relative to their earnings. Earnings season has seen some major shortfalls, especially for Boeing (BA) and Amazon (AMZN). Amazon plummeted on Friday after dismal earnings by 12%. When major bellwether stocks fall and the index looks overvalued, the index may face increased selling pressure.
The cryptocurrency market has fallen starkly as well. It appears that due to the financialization of Bitcoin that BTC and the rest of the cryptocurrency market are positively correlated with the S&P 500 by 61%. If the S&P 500 and NASDAQ continues the downward trend, we could see an even deeper rout. Bitcoin has been range bound between 39,000 and 43,000 and interest rates may rise up to 500-basis points next week. We could see further selling pressure if the market reacts to the FED rise in rates, as is per usual.
As an investor, I am limiting my exposure to further investment in the S&P 500 index for now. I see opportunity in some solid REITs and dividend champions with strong fundamentals that have fallen with the broad market. If the index has another bad week and drops below 4,000 we may see a major correction. The index could fall to its resistance of 3,500 from there easily if institutional sellers join in. We have been in a major bull market since 2010, and we may see a reversion to the mean soon. What are your thoughts on the matter?
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