Why A Hyper-Focused Market Makes Me Cautious

It is not that uncommon to start a week off slowly, with the market waiting for big events that are expected in the coming few days, but it seems to be the case more recently than I remember it being in the past. It is not that there haven’t been unanticipated news stories or that things haven’t happened outside of market hours; it’s just that the market is driven by more predictable, scheduled events.

Over this weekend, for example, three U.S. servicemen were killed by a drone attack in Jordan that is thought to have originated in Iran. That is something that at another time would have prompted a big market reaction. However, stock indices are indicating a flat opening today. Traders are apparently waiting for big tech earnings and the Fed decision that are due later in the week, ignoring the potential spark of another hot war in the Middle East or, in the current environment of complex alliances and a divided world, quite possibly beyond.

In some ways I get it: Most market reactions to geopolitical events are overdone, but completely ignoring something that could, in market terms, at the very least disrupt oil supplies and force prices higher, seems somewhat cavalier. The reason is presumably because the current level of the major indices is based almost entirely on the things being awaited: big tech earnings and outlook, and the Fed. That, though, creates the potential for a big problem this week.

In terms of big tech earnings, Microsoft (MSFT) and Alphabet (GOOG, GOOGL) kick things off after the market close tomorrow, followed by Apple (AAPL), Amazon (AMZN), and Meta (META) on Thursday. Over the last year, all five of them have shown massive gains that easily outpaced the broader market: 64% for MSFT, 55% for Alphabet, 34% for Apple, 60% for Amazon, and a whopping 167% for Meta. Meanwhile the S&P 500 has gained 22%, with much of that being due to the performance of the magnificent seven.

The problem is that when the fate of the market is so tied up in seven stocks, all in the same sector, even prudent caution from them in their earnings commentary and outlook could prompt a major selloff.

The situation with the Fed is similar in some ways. There is now an almost scary unanimity of opinion as to what they will do this month and going forward, at least when it comes to the stock market. This month’s meeting is expected to change nothing. Fed Funds futures are pricing in a 97% chance of “no change” when the FOMC announces their decision on Wednesday, but an expectation of a rate cut in March. The indication of that chance, though, is down to around 60%, having been as high as 90% at the end of December. The Fed may take that as a sign that they can damp down expectations for a rate cut without overly disrupting markets and adopt a relatively hawkish tone in their notes accompanying their decision.

However, the problem is that while the Treasury futures market has curbed its enthusiasm somewhat, stocks at or close to all-time highs suggest that equity markets are still committed to cuts coming early and often. So, while this may be a good time for the Fed to rein things in without creating problems in the interest rate markets, attempting to do that could result in significant volatility in stocks.

Now imagine a scenario where both of those things happen: the big tech companies reporting this week disappoint, either in terms of results or outlooks, and the Fed makes it sound as if a March cut is off the table. When you say it out loud, that doesn’t seem too far-fetched but, if it were to happen, who knows how much ground stocks would lose when the conventional wisdom regarding the two things most responsible for current strength changed.

I have often said that when traders start to ignore one side of the news, good or bad, the market is usually about to turn. Right now, the complete lack of a response to an event that represents a real threat to global security is an example of just that, and with everyone looking for confirmation of their biases from the two eagerly awaited events this week, even a small disappointment could be magnified. I don’t expect a major move down this week, but seemingly unlike most people, I am all too aware that it could happen, so I will be taking a cautious approach until Friday.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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