Traders and investors are considering whether or not to buy the stock market dip heading into third-quarter earnings season.
Tom Essaye, founder of Sevens Report Research, has highlighted four catalysts that will determine if the market finishes 2021 at new all-time highs or continues its retreat.
Essaye says the recent turbulence in the stock market has occurred as investors have priced in positive developments in the easing of the COVID-19 delta variant wave and clarity from the Federal Reserve on its tapering plans. At the same time, investors are likely still concerned about corporate tax hikes and their potential negative impact on 2022 earnings.
Here are four factors that will determine which direction the market heads in the closing three months of the year.
Related Link: Stock Analyst Looks Ahead To 2022: ‘Gains May Not Come Easy’
Tapering And COVID-19: First, inflation and jobs numbers will be critical in determining the pace and size of Fed tapering. Essaye said a more gradual tapering than the $10 billion-per-month pace the Fed has implied would be bullish for stocks, while a more aggressive approach could be bearish.
Second, investors will continue to watch COVID-19 case numbers and vaccination rates heading into the winter flu season. A spike in cases, a new variant or any negative headlines related to vaccine efficacy could send stocks lower, but falling cases and hospitalization rates would be bullish news.
Bond Yields And Taxes: Third, Essaye said a gradual rise in Treasury yields would likely be bullish for the market, but a spike to new 2021 highs in the next several weeks could pressure stock prices.
Finally, Essaye said tax reform is critical.
“Right now, the current market valuation assumes that tax increases are relatively small (and that companies bear most of the brunt) and that earnings do not slip from current levels,” Essay said.
Given the current set of circumstances, Essaye said the S&P 500 is largely fairly valued following the September pullback, but the factors above suggest it’s likely the stock market will remain volatile through the end of 2021.
Benzinga’s Take: If you’re a long-term investor, buying the September dip was likely the best response to the market weakness. If you’re a shorter-term trader, proceed with caution in a market that is entering a critical third-quarter earnings season with a long list of potential market-moving catalysts hanging in the balance.
Photo: Tima Miroshnichenko from Pexels