The incomparable Street.com published an informal poll sometime during yesterday’s, mid-morning dead-cat bounce (following the carnage of the day before). The results of said poll indicated that while 47% of folks were bearish of the US stock market, a solid 68% were still bullish. The incomparable Street.com seemed to imply that this was a positive signal for stock prices.

Leaving aside for the moment the fact that 47 plus 68 equal 115, may we humbly offer a less sanguine interpretation of said poll results? Viz, that if the Street.com’s pundits are shrugging off the market’s plunge, there may be more plunge to come? In the short term, at least, the relaxed presumption of a continuation of the bull market needs to be rattled out of the sort of investor who responds to  the Street.com polls.

In our view, critical to the formation of an opinion on just how much rattling needs to take place and just how much plunging is yet to come, is a proper reason explaining why we are experiencing market plunges in the first place.

In a review of the usual suspects, first up is valuation. Is the market expensive? The S&P is on 16.5x trailing earnings (down, quite abruptly, from 18.6x last week). And on 15.8x forward earnings (17.7x last week) based on modest 5.5% earnings growth over the next 12 months. Compared to long term averages, these are not extravagant PE multiples. The average trailing PE for the S&P since 1980 is 17.7x and the average forward PE is 16x. The range is 12x-30x although, to be fair, we only got to 30x once, in a fit of hysteria when normally sane citizens fell over themselves to pay something for nothing.

On a price to book basis, the market looks almost attractive. The S&P is on 2.5x price to book versus the 35 year average of 2.8x. On a price to cash-flow measure, the S&P also looks appealing. Dividend yields? The S&P is currently offering a handsome yield of 2.2%.

Moreover, it is worth remembering that the market’s long term average PE of 16 was set in a period when long bond yields averaged 5%. Today long bond yields are 2%. Also, net debt to ebitda has fallen from almost 5x to 1.9x since 2007 as corporations in the S&P 500 Index have reduced their debt by 61%. Stocks arguably deserve higher valuations today.

So, no, the market does not look expensive to us. In our view, the market was not expensive last week either and we would argue that the recent downdraft was really nothing to do with valuations, per se. And on valuation criteria alone, we are at a loss to see why the market would need to plunge further from here.

Ah, but, the problem is not valuations per se, (we can almost hear our readers cry) but valuations in conjunction with rising short term interest rates. Ah, yes.

Second up; tighter monetary policy. Ms. Yellen has telegraphed far and wide her intention to start raising short term interest rates in September. She has also made clear that her decision will be driven by the data. By that we take her to mean the economy will be showing decent growth across most important sectors and be resilient enough (in the Fed’s opinion) to withstand a normalization of the yield curve without wilting. Fans of data ourselves, we looked at the economic indicators available to mere mortals in the public domain and concluded, with all humility, that it is possible Ms. Yellen has actually missed her window of opportunity.

Industrial production growth has slumped over the last six months from 4.9% to 1.3% on July. Manufacturing and Trade sales peaked in June of last year and fell 4.6% over the subsequent seven months – the first fall of such magnitude since the last recession. Exports took a hit in Q4 2104 and Q1 2015 falling by 4.5%. Manufacturing Orders contracted every month during the second half of 2014 and into January of this year. GDP growth has moderated from c.3% to 2.3%.

No question, economic activity has run out of puff in the last six months.

What about inflation? – the usual reason any central banker decides to raise interest rates. The reported numbers at least, show no resurgence of inflation in the US at all. The CPI ex food and energy is bumbling along near its all-time low of 1.8% year on year. Average hourly private sector wage growth is back under 2% year on year after a brief bounce to 2.4% in Q1 2014. Commodity prices have been weak…

A  sudden pause in economic growth and no inflation. Maybe Ms. Yellen should reconsider? If she really is data-driven, why didn’t she raise rates a year ago, when the economic picture looked significantly rosier? If she didn’t do it then, how can she possibly want to do it now?

Only one answer comes to mind; asset prices. House prices and stock prices have been rising significantly faster than inflation. But look, just the threat of higher interest rates has already had the intended effect on the equity market.

Asset price bubbles and house prices notwithstanding, we conclude that given the softer economy and the absence of any nasty inflationary pressure, rates, whenever Ms. Yellen makes her move, will not go up by much. The market historically has been able to tell the difference between serious tightening to forestall over-heating and accelerating inflation (1989, 2000 and 2008) and not-so-serious tightening (1993) to return to a regular yield curve.

So, yes, investors have been skittish about the timing and magnitude of interest rate increases but deep down they realize that monetary conditions that are a little, itsy bit tighter than they are today will not signal their doom.

No, what they are most concerned about, in our opinion, is the very thing which may stay the Fed’s hand; the economy’s lack of puff.

Why has the US economy stalled? Everything was just fine until June 2014. In our view, the 22% revaluation of the US Dollar in eight months has a lot to answer for. The US economy has rarely suffered such a jolt to its terms of trade. (Outside of the last recession, the last time the US Dollar revalued so abruptly was in 1998 when investors were busy with other distractions).  No wonder the manufacturing sector and exports have dived while housing, a completely domestic industry, has continued to prosper.

For an even clearer picture of the divergence between the tradeable and non-tradeable sectors, compare the non-manufacturing purchasing managers survey, whose index has been on a steadily upward trend since 2011 and hit a new high in July with the reversal in S&P 500 Index revenue growth from +5% to -4% in the past three quarters.

But while exports are only 14% of GDP and the services sector in the US is larger than the manufacturing sector, foreign sales account for almost half of revenue for the companies in the S&P 500 Index. The rise in the dollar has wreaked havoc with corporate earnings growth over the last three quarters, and these earnings are what investors care about most of all. Earnings for the S&P 500 peaked in Q3 2014 and are down 3% in three quarters after 24 straight quarters of growth. Of course investors are spooked.

But the Dollar effect is, to a great extent, temporary. It will be anniversaried. Prices will be adjusted. US industry remains competitive. The US current account deficit is just 2.3% of GDP down from 6% in 2006. And the domestic sectors of the economy continue to grow. If we are correct, and the rise in the Dollar is the most important reason for the recent weakness in manufacturing, industrial production, exports, sales and earnings growth and, most visibly, equity prices, the stock market will not have to do too much more plunging.

Gosh, maybe the Street.com’s pundits were right after all.