Morning Comment: A short-term pause would be healthy, but Sept/Oct is not far away

There are so many crosscurrents going on in Major League Baseball. Some things make total sense…like the fact that the zillions of dollars that the Dodgers have spent on excellent players has led them to the best record in baseball. Other developments don’t seem to make much sense at all. For instance, the Red Sox are in last place…15.5 games out of first place…but they’re still only 4.5 games out of a Wild Card playoff spot! How crazy is that?....Of course, the fact that they keep beating the Yankees on a pretty regular basis is giving Red Sox fans a lot of hope…and the fact that the Mets now have a better record than the team from the Bronx has Yankee fans becoming more nervous by the day……It looks like spending enormous amounts of money only works in the National League. 😊

BTW, “The Judge” has got to know by now that he could hit 100 home runs if he played regularly in Fenway Park! That would allow him to surpass Barry Bonds’s artificially-induced home run record of 73. Therefore, we’re thinking that switching to the Red Sox will be the obvious move for him…especially since it will give him a much better chance of winning a World Series! 😊😊😊……..(However, if he goes to the Mets, it would be a biggest thing to happen to MLB since Babe Ruth moved to the Yankees just over a hundred years ago…maybe even bigger!!!)

Anyway, there are some pretty interesting things going on in the marketplace right now as well. The momentum in the stock market this summer has certainly been fabulous. This is true even though economic and earnings growth estimates have been coming down for 2022 AND for 2023. Yes, it certainly does look like we’ve reached “peak inflation,” but when that happened the last time we had seriously high levels of inflation (in the late-1970s & early-1980s), the S&P 500 was trading at 7x-8x reported earnings. This gave the stock market a lot more upside potential than it does today…given that it bottomed at 18.5x reported earnings (and 16.1x forward earnings) earlier this summer.

Of course, if the Fed completely pivots, it could push valuation levels to the stratosphere once again. However, this will have to include more than just throttling back on rate increases. In fact, it will have to involve more than cutting interest rates. It will need the kind of steroids that Barry Bonds used 25 years ago (and that the Fed has used over the past dozen years). In other words, it will need another big liquidity injection…like the QE programs have provided since the financial crisis. Therefore, if things get SO bad next year…that the Fed will be forced to not only cut interest rates…but to also begin adding a lot more liquidity…and thus grow their balance sheet after only shrinking it in an incredibly mild way…the market should be able to rally strongly at that time. However, we question whether the stock market will be anywhere near as high as it is today…if things get THAT bad at some point over the next 6-12 months.

We just find it hard to believe that the stock market can rebound to more than 20x earnings and 3x times sales without another massive liquidity program from the Fed. And we find it hard to believe that anything short of a crisis will cause them to provide that kind of liquidity. Given that inflation is very unlikely to drop anywhere near their 2% target…especially since most commodities have turned higher again over the past six weeks…and since they will have a very tough time falling a lot further given food & energy prices are being decided more by supply issues than demand ones…it’s hard to think that inflation can fall much lower than 5% any time soon. (In other words, demand destruction cannot have the kind of sustainable impact to push the prices of food & energy a lot lower while the war in Ukraine continues and the sanctions on Russia remain in place.)

Having said all this, one of the most accurate old sayings on Wall Street is, “The trend is your friend”…and the trend has certainly been a very bullish one over the past two months. Yes, the futures are pointing to a lower opening this morning…over more concerns about growth in China. However, after four straight weeks of gains, the stock market was getting ripe for a “breather” one way or another. Therefore, it is unlikely that the bulls will lose a lot of enthusiasm if we see a mild pullback this week. It will likely take a big jump in interest rates (that signals that the trend towards higher rates has returned)…or a big reversal in the tech stocks (especially the chips)…or both…to raise any near-term concerns about the stock market.

However, we’re now moving into the second half of August. That means we have a big meeting in Jackson Hole coming up. More importantly, it means that we’re headed into a seasonally poor timeframe for the stock market. No, the market does not ALWAYS decline in the months of September/October. In both 2017 and 2019, the stock market kept marching higher each time. However, 2019 included a behind the scenes QE program that pushed things higher. It does not look like we’ll get that this year. In fact, September and October is much more likely to be the time when the Fed starts shrinking their balance sheet in a significant way…….In other words, “fighting the tape” has been a losing cause for many weeks now…but things could change very quickly as we move towards the fall months.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Aug 15, 2022 — 8:08 AM
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