Morning Comment: The Fed's New Message is Clear.

The market will impact the Fed, not the other way around.

We don’t know why people keep talking about the Fed when it comes to the upcoming moves for the stock market. That is a waste of time right now. Whatever the Fed does in September is going to be completely dependent on what happens in the trade war…because THAT’S what’s going to impact the economy going forward (and markets as well).

If the trade war boils-up again, the prospects for the economy will decline in a material way…and the stock market is going to get hit hard again. THAT, in turn, will cause the Fed to cut rates again. However, if the trade war calms down…and the stock market stops falling (especially if it bounces back towards its all-time highs)…the Fed will not cut rates. Instead, they’ll just sit on their hands. It’s as simple as that.

Trump won't get more from the Fed than a down payment.

Yes, the Fed DID make an insurance rate cut in July, but based on everything we heard from Mr. Powell and other FOMC members last week…tells us that the Fed will only move if things in the economy/markets turn down. In other words, the Fed just told us (last week) that although they were willing to help President Trump pay for his trade war with a down payment…they arenot willing to pay for the entire trade war in advance. Therefore, the Fed is moving from being “data dependent” and (especially) “market dependent”… be “trade-war dependent.” Why? Well, for the simple reason that both the “data” and the “market” have become so “dependent” on the ebbs & flows of the trade war!

This is a long-winded way of saying that the President can complain about the Fed all he wants, but it’s quite evident that the trade war issue is the one that has caused the economy to slow-down and the stock market to decline recently.

Former NY Fed President Dudley warns the markets (and the Fed).

We’d also highlight the piece on Bloomberg today authored by former NY Fed President Bill Dudley. In it, he warns that the Fed should not encourage Trump’s trade war. Mr. Dudley says the Fed should not provide “offsetting stimulus”…as it will only encourage the President to escalate the trade war.

More importantly, Mr. Dudley points out that Chairman Powell hinted last week (at Jackson Hole) that he’s aware that the President is trying to get the Fed to pay (or offset) Mr. Trump’s trade war…and that the Fed’s tools are not well suited to mitigate any damage a trade war would inflict. In other words, whether the Fed’s July rate cut was a down payment to help the President or not…we’re not going to get any more of them. The message is clear: If more rate cuts are coming, it will only be in response to a breakdown in the economy & markets. They will not be implemented to buoy the economy/markets in order for the President to fulfill his policy goals. (We keep using the phrase “economy AND markets” because even though the Fed says the economy is their main/sole determinant…anybody who has been paying attention in recent years knows that the Fed actions are very much “market dependent” as well.)

A correction would still leave the markets in good shape.

Anyway, the stock market was able to retrace half of its losses from Friday yesterday…as the S&P 500 remains VERY volatile. However it remains volatile within a range that is constrained by its 50 and 200 DMA’s. The volume yesterday 27% lower than the volume we saw on Friday’s big decline, so that is disappointing. We’d also note that the VIX spent most of the day in positive territory (and closed with only a mild loss). Therefore, there are several reasons to be skeptical of yesterday’s rally.

However, as we mentioned above, despite all of this volatility…the stock market has still been range-bound and is only 5% from its all-time highs! We’d also note that the S&P still stands 22% above its December lows and 57% above its early 2016 highs!!! Therefore, if we get the kind of full-blown correction that we’re looking for (-10% to -15%), it will not be the end of the world! It will actually be normal and healthy…and even if the S&P falls to the low-end of our expectations, it will still leave it 10% above its December lows and 40% above its 2016 lows (as well as in positive territory YTD)!!!

We have to step back and look at the fundamentals, but.....

As so many pundits keep telling investors right now, we all need to step back and look at the fundamentals during this period of wild swings. The problem is that those fundamentals are weakening. No, it does not mean we’re headed for a recession or a bear market, but when you combine this fact with the our belief that the trade war is not going to be settled for a long time, it tells us that the stock market is going to have a very tough time rallying back to its all-time highs. Instead, the new risk/reward equation tells us that we’ll see lower-lows as we move through the September/October time frame.

Again, this will not be the end of the world, but it will still be scary. Therefore, those who raise a little bit of cash now will be in good shape…both financially and psychologically…to take advantage a deep pull-back. (Just because something is “normal & healthy” does not make it easy.)

Lee Corso is the best!

Finally, we’d just like to say it is GREAT to see that 84-year-old Lee Corso is on ESPN’s “Game Day” again for yet another college football season! There’s nothing better than Saturday’s in the fall…and college football…especially when it includes Coach Corso and his “Headgear picks”!!!!!

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC


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 27, 2019 — 8:08 AM
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