I have not been as close to the markets as I would have liked the past two days because I was travelling to attend a funeral. However, you didn’t have to be watching every tick in the marketplace to know that the stock market has rallied very strongly over the past two days. A big drop in oil…some constructive comments out of both Russia and Ukraine…and some bullish comments from Fed Chairman Powell about our economy…have all come together to give the markets a nice boost. The advance has given the S&P 500 a rally of 4.4% since Monday…and a 6.8% pop for the Nasdaq. We’d also note that yesterday’s move came on good volume and breadth. (The volume was 5.7bn shares on the composite volume…and the breadth was almost 5 to 1 positive for the S&P and 11 to 1 positive for the NDX Nasdaq 100 Index.)

Another bullish catalyst for the rally has been the big bounce in China’s stock market (and the Chinese stocks listed here in the U.S.). This came after news became public that China was going to soften the crackdown in their country. This is exactly what we were looking for when we highlighted in our most recent weekend piece (and again on Monday morning) that China’s stock market (and the FXI big-cap China ETF) had become EXTREMELY oversold. More specifically, we said, “As bad as things appear for this market, it is becoming ripe for at least a short-term bounce. Thus, if the Chinese authorities step to the plate to support their markets at all this week, we could see a rip your face off bounce at some point in the near future.” This is EXACTLY what has taken place!.....When you combine this with our call for a sharp decline in crude oil when it was trading at $130 at the beginning of last week, it shows that we continue to make excellent calls in these very volatile markets.

Ok, now that we’ve dislocated our shoulders patting our selves on the back, the question we now face has to do with whether this strong bounce in the stock market is something that will last…or it’s something that just worked-off some of the very bearish sentiment that has developed in recent weeks. In other words, is this just a bear market rally that will reverse soon…or is it the beginning of a new leg of the bull market?

Well, given what we heard from Chairman Powell, we think it’s just another bounce in a decline that will last quite a bit longer. We have been saying all along that the main reason we have been so cautious on the stock market is due to the Fed’s dramatic change in policy. They went from a policy of MASSIVE accommation…directly to tightening (and tightening in a faster/more aggressive way than they had been saying they’d do)…without stopping at neutral. Therefore, the stock market…which had been pushed to levels that could not be justified by their underlying fundamentals by the massive monetary stimulus…has nowhere to go but down…now that this stimulus program was being reversed in such an important way.

Given that the Fed has become even more hawkish with their comments yesterday (even if it was only slightly more cautious), we believe the line of least resistance for the stock market over time will be lower. With the Fed expecting to raise rates six more times this year…and to start shrinking their balance sheet in May…it’s going to be very hard for this (still) expensive stock market to avoid further weakness.

We say that the stock market is “still expensive” because we strongly believe that earnings estimates for 2022 will come down in a material way. We’re finally seeing a few firms cut their full year estimates…so it’s only a matter of time before more firms do the same thing. When the Q1 earnings come out (in Q2), we believe these numbers will be cut even more aggressively. Therefore, the current forward P/E reading on the S&P 500 (of 18.5x-19x earnings…which is still quite expensive on an historical basis) is way too low for what earnings expectations will be a few short weeks from now.

Of course, the headlines coming out of eastern Europe will likely push the markets in both directions over the very-short-term. However, for those who want to know which way the economy and earnings are going over the rest of this year, they only have to look at the yield curve. Despite the rise in long-term rates to their highest levels since 2019, the 2y/10yr yield spread has fallen to just 20 basis points (it’s lowest level since the worst part of the pandemic)……..The economy might be strong enough to handle the Fed’s new tightening policy (the way Powell said it is yesterday), BUT it’s still going to slowdown. THAT is not good for an expensive stock market…and thus we are staying with our cautious stance.

Finally, I’d like to end this morning’s piece by repeating something my 92-year-old father has been telling me my entire life. There are only two kinds of people in this world: Those who are Irish…and those who wish they were!!!......Happy St. Patrick’s Day!!!

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com

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.