Is the S&P 500 Drawing Close to Comfort Threshold?

The S&P 500 (USA 500) seems to be straining under the burden of global economic issues as the index’s down days continue to add up, decreasing more than 3.5% during the last 12 trading days. A series of factors may be combining to push the S&P 500 close to the threshold of its ‘comfort zone’, defined as its average price over the past 50 trading days, 4,436 as of September 17th. Last Friday’s market sell-off caused the index to drop several points below this dangerous threshold, and more such days could be in store. (source: bloomberg.com)

Recently, several companies on the index have released earning reports that have failed to live up to investors’ hopes. These cases may be indicative of a wider sense of fatigue across the market.

A wide range of industries have struggled with supply chain disruptions over the course of the COVID-19 pandemic; firms in the materials production have been among those most acutely affected recently.

An example of the above can be found with paint companies PPG Industries (PPG) and Sherwin-Williams (SHW), which have both seen their sales negatively impacted by the inability to source necessary raw materials for production lines. The latter company had been expected by some to post a high single-digit rise in sales compared to Q3 2021; due to a shortage of raw materials rather than a drop in consumer demand, Sherwin-Williams’ Q3 2021 sales figures could even be lower than those for the same period last year. PPG has faced similar obstacles to sales growth, as revealed by its revised Q3 2021 sales predictions, lower by about a quarter-billion dollars than had been projected in July. In addition to the strains placed upon supply lines by the continuing coronavirus pandemic, Hurricane Ida has had a deleterious impact on paint suppliers in particular. Although these companies’ travails may seem to be limited to their branch of industry, a Bank of America (BAC) study has revealed that materials producers’ earnings tend to closely track the performance of S&P 500-listed companies as a whole. 

Fed Meeting Apprehensions

Uncertainty seems to be clouding the outlook for U.S. economic policy leading up to the Federal Open Market Committee’s meeting this week. The FOMC will likely discuss whether the American economy has recovered enough from the travails of the pandemic for tapering to begin.

Some market watchers believe that the Fed may soon reach the point where a tapering of bond purchases seems feasible because of a continuously rising inflation rate. However, Jerome Powell, the Chair of the Federal Reserve, stated at the Jackson Hole summit in August that he believes the economy has yet to improve enough for the Fed to consider such measures. Continuing uncertainty regarding important macroeconomic policy moves on the part of the federal government may be having a drag effect on the S&P 500 as investors become more cautious.

So far, investors have bought the dip as the S&P 500 draws close to its comfort threshold, like they did last week. However, it remains to be seen whether the continuing uncertainties surrounding supply chains and Fed policy could keep the index down in a more enduring fashion.