The stronger than expected CPI data clobbered the stock market yesterday…as the S&P 500 fell more than 4% and the NDX dropped more than 5%. The decline came on breadth that was absolutely horrible. It was 99 to 1 negative for the S&P…and ZERO stocks advanced in the NDX! (Yep, 0 advancers vs. 102 decliners for the NDX. And yes, the NDX 100 has more than 100 stocks…just like the S&P 500 has just over 500 stocks.)…..However, the volume was not particularly high. Just 4bn shares traded in the composite volume…which is well below the 2022 average daily volume. In other words, even though the breadth was extremely negative, the lack of volume says that we did not see signs of capitulation yesterday.
In other words, as my old boss, Dick Ganong, used to say, “It was an orderly disaster.” The problem is that “orderly disasters” are usually not a sign of a bottom. It usually takes a messy “washout” move to signal that the worst is behind us. Therefore, we believe that yesterday’s big decline was just something that tells us that a second leg of this bear market has indeed begun. That said, it will take a meaningful move below the September 6th lows to confirm that this second leg had begun, but we’re not far from those levels. On the S&P 500, the September low came-in at 3,900 (3908 to be exact)…and for the NDX 100, the lows from earlier this month came it at 12,000 (12,011 to be exact). Since it will take a “meaningful” break below those levels, we can indeed use those round numbers as the levels to keep an eye on.
This morning, the futures are flat as we go to press. Therefore, it’s hard to know whether we’ll see some immediate downside follow-through…or if that will be put-off for a few days. However, given that the market is still somewhat expensive on a P/E basis…and quite expensive when you look at price-to-sales and price-to-book…it seems to us that the market will have further to fall in order to get back into “balance” with its underlying fundamentals.
The CPI number also caused long-term interest rates to spike higher…and the 10yr yield now stands at 3.43%...which is in within a whisker of the June highs of 3.47%. Given that the June highs in long-term rates coincided with the June lows in the S&P 500 (within two days), it’s not a stretch to think that a retest of the June lows in the stock market is very likely in the coming weeks. This will be especially true if the June high in yields is exceeded in a significant way…which is not out of the question given that QT is scheduled to double this month.
In other words, concerns about inflation staying elevated for longer than the consensus had been thinking is not the only reason to worry about higher interest rates. The shift in the supply/demand equation that will result for the doubling of the size on the monthly QT program is ANOTHER reason to worry that long-term interest rates will head higher in the not-too-distant future. That does not bode well for those who remain bullish on the stock market right now.
We get the second half of this week’s inflation data this morning…with the release of the PPI (producer price index). We don’t know if this number will also be higher than expected. However, if (repeat, IF) it is, it’s going to raise even more questions about earnings growth over the rest of this year…and next year as well. PPI measures input prices (costs) for companies. If those costs remain high…at a time when the consumer becoming more stressed (as can be seen with the big increase in credit card debt)…it’s going to be very hard for companies to continue to pass on their higher costs to their customers. If they cannot pass-on those costs on, it’s going to cause margins to shrink…and earnings to decline. That is not good for a stock market that still stands at the expensive side of things (even if its less expensive than it was at the beginning of the year)……If earnings estimates have to come down, it will mean that today’s forward P/E ratio is higher than what most pundits have been quoting recently…and that’s not good for a stock market that is facing even higher interest rates.
With all of this in mind, we believe that investors should use any bounces over the near-term to continue to raise cash and get more defensive in the coming days and weeks. We believe that the June lows will be breached before the year is over…and thus those who have some cash on the sidelines will have better levels to pick up their favorite stocks at some fabulous prices………As painful as bear markets can be, they’re quite normal (and they’re also even actually quite healthy for the longer-term well-being for the stock market). Those who have cash on the sidelines when the market bottoms in bear markets are rewarded with buying opportunities that only come along a few times in one’s investing lifetime.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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