The S&P 500 had a great bullish run this summer – only to be defeated after Fed Chair Jerome Powell threw cold water all over that progress during his speech at the Jackson Hole Symposium last week.
If you missed it, he basically told traders three things…
The Fed isn’t convinced that inflation has peaked…
The Fed plans to keep aggressively hiking interest rates…
And the Fed plans to keep interest rates high for a while.
This news sent traders into a profit-taking frenzy, pushing the S&P 500 lower, and wiping out nearly all of the late-July gains the index had made.
It’s incredibly frustrating, and many traders are wondering if the S&P 500 will return to the bear-market territory it just eked out of.
To address these concerns, we have to look at the investment options that are available to traders and see how they currently compare.
Now, we’re going to get a bit technical – but stay with us, because each of the points we’re about to cover play a key role in determining a few things…
Whether the S&P 500 is heading toward another bear market…
And whether it’s time to enter the market again (with caution).
Searching for Higher Yields
Traders are always searching for higher yields.
The baseline yields traders typically use when assessing their investment opportunities are Treasury yields – like the 10-year Treasury Yield (TNX) – because they know that Treasuries provide a reliable yield, backed by the full faith and credit of the United States government.
Treasury yields fluctuate as inflation, monetary policy, and economic growth expectations change.
The TNX moved higher in August as bond traders prepared for the potential of aggressive rate hikes. It has rebounded from its recent lows at 2.5% and is currently offering a yield of ~3.1%.
Now that you have identified the “risk-free” baseline yield offered by the TNX, you can evaluate other investment yields, like the yield on the stock market.
But how do you determine the yield of the stock market?
You look at the earnings yield – which is the earnings the market generates, compared to the price you are paying for those stocks (i.e. the E/P ratio).
If you’ve never heard of the E/P ratio before, you’re not alone. But even if you haven’t, it should look at least vaguely familiar. That’s because it’s the inverse of the P/E ratio.
The Real “Inflation Trade”
According to The Wall Street Journal, “Investors are preparing for wild swings in financial markets, worried that inflation, and the Federal Reserve’s pledge to let it rise, will lead to a more volatile world.”
If you’re worried about the up-and-down markets, like many folks are these days, and you’re willing to learn something new, this is the real secret to hedging against wild markets…
And making as much as $1K or more in instant cash payouts at the same time.
Using the P/E Ratio of the S&P 500 to find the Earnings Yield
You can determine the current earnings yield of the stock market – as measured by the S&P 500 – by finding the inverse of the S&P 500’s current P/E ratio.
For instance, according to multpl.com, the current P/E ratio for the S&P 500 is 20.14 (see Fig. 1).
Fig. 1 – S&P 500 P/E Ratio (Chart courtesy of multipl.com)
Now that you know the P/E ratio, all you do is find the inverse of this number to determine the earnings yield on the S&P 500, which, in this case, is 4.96% (1 / 20.14 = 0.0496). You can also see a graphical representation of this on multipl.com (see Fig. 2).
Fig. 2 – S&P 500 Earnings Yield (Chart courtesy of multipl.com)
The Bottom Line
We know this was a super technical article, but we want you to take away two key things…
If the TNX continues to rise, that will continue to apply bearish pressure to the stock market (however, we wouldn’t be surprised to see the TNX hit resistance at 3.2%, which would help the S&P 500 hold above support at 3,900)…
And we think it’s too early to say the S&P 500 is headed back to bear-market territory.
So, the name of the game for right now is caution; now is not the time to dive blindly into any stock you think you might like.
However, that doesn’t mean that you need to stick to the sidelines completely.
Making cash in volatile – and even down – markets is possible, and it’s easier than you might think.
By focusing more on generating consistent income than chasing fleeting (and often extremely risky) fad stocks, you could have the chance to rake in instant cash payouts. Sometimes as much as much as $1,480, $1,655, or $2,475 in a single day
John and Wade
The post Weâre Not Out of the Woods, But Weâre Not In Bear Country Either appeared first on InvestorPlace.