This is the daily notebook by Mike Santoli, Senior Market Commentator at CNBC, with insights into trends, stocks and market statistics. What is suddenly alarming the market, leading to the dam failure? Nothing truly sudden, just more of the same – only more. The Federal Reserve and other central banks (Swiss National Bank, Bank of England) are behaving as if fighting inflation with the blunt tool of higher interest rates is a mandatory victory, and the price they are willing to pay in Economic weakness is implicitly greater than is comfortable for equity investors. The mantra here for months has been that the path to a possible economic soft landing is narrow and bumpy, and the Fed has acknowledged that it may have become even narrower and rockier. Consider the fact that one could plausibly argue that the Fed will have to raise rates much higher to contain inflation in a robust economy, while an equally credible voice notes that financial conditions have already tightened precipitously and the economy cannot absorb much. more on rate hikes – and you can understand the confusion and surrender feeling in the markets right now. Moreover, tactically, the two overriding rules of “Don’t fight the Fed” and “Don’t fight the tape” continue to dictate caution, defensiveness and low expectations. But with caveats: the Fed left open the chance that it would be able to modulate future rate hikes and, in fact, could have “pre-loaded” the move to a neutral rate. As for the tape, it’s a complete mess, with aggressively nasty downtrends and failing support – but we could be approaching expected “as bad as it gets” levels. We now only have 3% of S&P 500 stocks above the 50-day average, and at one point, nearly all of the Nasdaq 100 stocks are down. This brings us closer to washout-like conditions. This is just a first step in generating an oversold rally, which should be scrutinized for signs of genuine and broad real-money buying, which often needs to be tested. Lots of “proving” stages before things get better. For long-term investors, lower prices and thinner valuations, by definition, increase multi-year expected returns, but in tenacious bear markets, the rewards often come with more pain for a while, and after many have given up on the ride. . The S&P 500 is in a strong downtrend. Is it due to some relief now that it’s hitting that trendline? Perhaps, even if a previous and more gradual path has not been maintained with the last negative acceleration. The Nasdaq 100 has now lost a third of its value from its November peak, more than it gave up in the Covid crash. A further 12% drop would still be needed to return the index to its pre-pandemic peak, although strong earnings growth means it is less expensive relative to expected earnings than it was during most of 2017-2018. As for the S&P 500 valuation, it has dropped 16 times in future earnings, well below the 10-year average. The index has spent almost no time below the expected 15x gains since 2015, coming in at 14 briefly near panic lows in 2018 and 2020. The big caveat here is that the P/E is only as good as the estimated “E”. There is now growing recognition that earnings forecasts are likely to be too high for the remainder of the year and 2023. Outside of energy, earnings revisions have stagnated. The previous instances where stocks dropped sharply without earnings forecasts dropping were 2002 and 2011, and both times earnings dropped to close the gap. Still, applying an average multiple to slightly reduced earnings is one of the reasons many are targeting 3,400-3,500 as a working target for the S&P 500 – this is also halfway between Covid’s dip and record. , and approximately reaches the pre-Covid peak. It also hits a few other long-term averages (the 200-week moving average is now 3,477). It is often said that the hefty quarterly expiration of Friday options and futures is an aggravating factor in the index’s swings, especially as various strike price limits are tripped and market makers hedge exposures to a huge trove of stock options. overdue sale. There is some reason to think that there will be cleaner positioning on Tuesday (Monday is a market holiday) with a pattern of short-term reversals around and after large expirations. Also, the rebalancing later in the month would likely fuel some rotation back into equities. Nothing guaranteed or necessarily decisive, but noteworthy. Treasury yields started higher but are retreating, with risk aversion and growth concerns putting aside the inflation/Fed story for the moment. What if the Fed is lucky and inflation starts to moderate soon? Implicitly, the Fed is targeting gasoline prices, which it cannot easily influence. Gas prices feed consumer inflation expectations quite directly, which the Fed cited for its decision to raise 75 basis points. Is it significant, then, that gasoline futures are well above their highs as the seasonal peak approaches? Credit spreads are showing a new round of stress. Combination of growth fears, illiquid conditions and perhaps the (not unexpectedly) declaration of bankruptcy by Revlon leading to a flight of junk bonds. Junk bond spreads have yet to reach late-2018 levels, but the credit default swaps market is seeing more hedging/short activity than it has seen in some time. Bond volatility and macroeconomic fears set the stage for potential credit crashes. It is not a prediction or a current observation, but it is a characteristic of this market that keeps the warning lights on. As noted, we have a negative settlement-type market amplitude. Some indicators that track volumes up/down over time are recording rare extremes. Sure, markets fall from oversold rather than overbought levels, but we may be reaching a “close our eyes and buy” moment just for one trade at least. VIX under 34, concerned, but not massive purchase insensitive to the price of protection against disadvantages. Many panic order a print of 40 VIX before there is a low, but this is a preference, not a rule. The orderly drop in equities and a lot of hedge fund risk along the way undoubtedly means less hedge demand. But let’s see if fans can get that 4-handle on a final flush.