The CPI inflation number was higher than expected yesterday, but several pundits said that it was likely the last “hot inflation” report we’ll see. They could be correct, but who cares? If inflation is going to plateau at a level that is much higher than the 2% target the Fed is looking for…and above anything we’ve seen in 40 years…it’s not going to be enough for the Fed to throttle back on their tightening program very much. Sure, they might raise only 50 basis points at some time in the not-too-distant future…or even 25 basis points at some point this year…but they’ll STILL be tightening!
We believe this is a critical distinction to make. Don’t get us wrong, if the stock market was trading at 15x earnings or lower…like it has at the bottom of every deep correction/bear market over the past dozen years…we’d probably be singing a different tune. However, since the stock market is still expensive (which should be even more true in the weeks ahead…as earnings estimates come down), we do not take any solace in the thought that the Fed might become “less hawkish” in the coming months.
In other words, “less hawkish” is a long way away from the incredibly stimulative stance that the Fed took in 2021…and for most of the time over the past dozen years. For the stock market to be considered fairly valued at 17x earnings or higher…we’re going to need interest rates near zero…and another big QE program from the Fed. Without those ingredients, we’re going to have to settle for something between 15x-16x earnings that has been considered “fair value” in the years over the past 50 years (when very large stimulative programs were not endlessly in place).
With all of this in mind, we do not believe investors should start to get overly bullish if the Fed becomes less hawkish at some point this summer or early fall. Yes, if they completely pivot…and move towards another steroids-like QE program…THAT will be a time to become much more constructive on the stock market. However, just throttling back a bit from the current program will not be enough in our opinion.
Besides, the Fed keeps telling us that they are much more focused on inflation than growth. (This was reiterated once again yesterday by Richmond Fed President Barkin.) As we’ve said several times recently, we’re not so sure why so many people are so sure that the Fed will move away from their tightening cycle just because the economy continues to slow in a meaningful way. Paul Volcker caused TWO recessions in his fight against inflation. Given how much Chairman Powell has compared this fight to the one Mr. Volcker fought 40 years ago, we believe that it will take a lot more than a further slowing in growth to cause the Fed to change their policy in the kind of way that will create a good buying opportunity for a stock market that is still expensive.
Speaking of “still expensive,” this morning’s earnings reports out of JPM and MS that are kicking off earning season are knocking the futures lower. (JPM is so concerned…that they’ve increased their loan loss reserves AND suspended their company share repurchase program!) We’ve already (finally) seen the consensus 2022 estimates start to come down a little bit. If (like we believe) those estimates fall materially further as we move through this earnings season, we’ll discover that the stock market is really trading at 19x-20x earnings right now. Thus, the market is not just somewhat expensive…it’s still quite expensive.
On top of all this, we got a higher-than-expected PPI number this morning. (Then again, the “ex food and energy”, component was slightly lower than expected, so if people stop eating…and stop diving and heating/cooling their homes…inflation won’t be as much of a problem.) In other words, this means that input costs for companies remains a problem…which will continue to squeeze margins. Thus, this report won’t be good for the prospect for second half earnings of U.S. corporations either.
The negative news we got yesterday from the CPI data was not enough to cause the market to continue to decline after its gap-down opening. Instead, it was able to bounce nicely off those opening lows…and close more than 1% above those opening levels. This is something that we’ve seen several times since the stock market was able to bounce off its 2022 lows in mid-June. Therefore, maybe this will take place once again today…and the market will be fine. However, if/when the market gives us a day where it opens lower…and falls below those opening lows (and closes on its low of the day)…it’s going to quickly take away the small amount of investor confidence that has crept back into the marketplace over the past several weeks. THAT will not be good.
Of course, maybe the stock market can continue to shake-off bad news. If that is the case…and the S&P can rally back and take out the key 3,900 resistance level we’ve highlighted recently…it’s going to be quite bullish. If, however, this week’s decline starts to accelerate, it’s very likely going to tell us that we’ll see lower-lows for the year in the not-too-distant future.
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.