Inside The Stock Market ...trends, cross-currents, and outlook
What if the S&P 500’s September 2nd closing high were to miraculously stand as the cycle’s high-water mark? If it did, the peak was presaged—in retrospect—by two Federal Reserve Bank presidents who rode the liquidity wave all the way to its crest after assuring the floodgates would be left wide open. Both resigned in September.
The MTI’s move to its Negative zone with the October 1st reading was driven by a few trend breakdowns—ones that could well reverse in short order. Recognizing the volatility of these signals (and perhaps having been “conditioned” by the one-way market of the last 18 months), we opted for just a minor asset allocation adjustment.
Notwithstanding the hit to consumers’ pocketbooks, it’s been amusing to follow the Fed’s recent evolution with its mindset regarding inflation. A year ago, the hope was for “symmetry”—Fed-speak for allowing inflation to run above its long-time 2% target, since it had previously undercut that level for awhile. Then, early in 2021, the word “transitory” entered the lexicon; yet months of debate and tens of thousands of utterances on financial television have clarified nothing about the Fed’s characterization of that term.
Compare the U.S. monetary response in early 2020 to China’s: The Fed quadrupled the M2 growth rate (from 6% to 24%) in three months, while China merely bumped M2 growth from 8% to 11%. This relative policy restraint leaves China in a better position to handle potential fallout than if it had gone “all in” like the U.S.
The COVID rescue plan has generated a multi-trillion-dollar deluge of federal spending that has trickled down to government transfer payments, personal incomes, retail sales, and surging EPS. When considering all of these data series in relation to their long-term trends, it’s truly remarkable that the only item analysts consider to be “transitory” is inflation.
A stronger U.S. dollar is “supposed” to be bearish for commodities, but it’s been a banner year for most commodities with gold among the few that are down on the year. However, keep in mind that gold tends to be a harbinger of major moves in industrial commodities, with a lead time of about six months—and its year-over-year change is now negative.
In the middle of the last decade, we marveled at the Tech sector’s ability to flog the rest of the market quarter after quarter, with no meaningful breakout in valuations. Specifically, the median Price/Cash Flow ratio for S&P 500 Technology managed to “hug” the 15x level for about four years beginning in late 2013. Tech’s post-COVID boom is nothing of the sort.
Those in their peak earning years (40s and 50s) who’ve also enjoyed the stock market’s windfall gains are very likely to have seen their annual expenses climb much higher than the Consumer Price Index over the last several years.
The gap between YOY growth rates in M2 and nominal GDP just flipped negative after four quarters of record-high readings. In other words, the recovering economy is now drinking from a punch bowl that the stock market once had all to itself. Similar drinking binges occurred in 2010 and 2018, both of which then experienced corrections north of 15%.