The stock market rallied nicely yesterday...with the tech laden Nasdaq leading the way once again. The 1.1% rally in the Nasdaq Composite took it back above 10,000 and slightly above its early June highs. We have to point out, however, that the internals from yesterday were not very good. Volume was very low...at just 3.6bn shares on the composite volume...and breadth that was quite disappointing for a day with such large gains. For instance, the breadth on the S&P 500 was BARELY positive (just 1.1 to 1 positive to be exact)...which is worse than mediocre for a day where that index rises 20 points. It was only just 1.2 to 1 positive for the Nasdaq...which stinks for an index that rallies more than 1%.
The Citi Economic surprise index rose again yesterday...even though the existing home sales data was a bit lighter than expected...as the better-than-expected Chicago Fed National Activity Index rose nicely...and offset the disappointing home sales number. Of course, this data was month-over-month data, so it really doesn’t tell us much about how we’re doing on an absolute basis. Therefore, we still don’t put very much weight around these numbers...as solid evidence that the economy is doing as well as the stock market is pricing-in right now (or will do as well any time soon).
Of course, the economy did not bounce-back immediately after the financial crisis of 2007-2009 either. It was a tough slog. In fact, two years after the bottom of that recession, the economy had not regained its formal levels or reached a level of normalcy. This might give some people a lot of confidence that we don’t need a return to the pre-pandemic levels for the stock market to rally further from current levels. If it took more than two years to get back to normalcy...and yet the stock market kept rallying over those two years...the same thing can happen this time.
That sounds great, but the BIG difference this time around was that two and a half months after the bottom, the stock market had not bounced anywhere near as strongly as it has this time around. Therefore, the stock market was not pricing-in a quick return to normalcy...like it is today!!!
Two and a half months after the stock market bottomed in 2009, it had only retraced 30% of its losses. This time, it has retraced 75% of its losses!!! In fact, it took over two YEARS for the S&P 500 to recover 75% of its loses from the financial crisis. Therefore, the stock market did not jump ahead of the future growth potential in the economy at anywhere near the pace it has this time around. As we moved into 2010 (nine months after the bottom), we still had no idea how strongly the economy would recover by 2011. Therefore, the stock market’s rally was a much more realistic one...and not merely based on HOPE (like today’s is)...and thus it still had plenty of room to rise. .
Yes, we understand that the stock market fell a lot further in 2007-09...and the system moved to the brink. However, given the “repo madness” situation of last September...and the fact that the credit markets were freezing up once again in March...the system was a lot closer to the brink in Q1 than most people realize. (To reiterate, it was NOT as bad as 2008/09...but it was still VERY bad. Why do you think the Fed came at the problem with such MASSIVE, MASSIVE force????).
What we’re saying is that the rate that the stock market rallied in the months and years following the financial crisis made sense. It was strong, but it did not start pricing-in a return to pre-crisis normalcy in the economy for a very long time. This time around, it has started pricing-in a return to the pre-pandemic levels almost immediately. Since nobody knows when we’ll reach that level of “normalcy” again, we would argue that a 75% retracement of the sell-off cannot be attributed to the fundamentals. It HAS to be coming from Fed liquidity AND (just as importantly) the belief by investors that the Fed will keep the rally rolling along nicely in the future.
As we have been saying all along, maybe the only thing the stock market needs to rally further over the coming months (or even years) is central bank liquidity. Maybe the fundamentals don’t matter at all any more. However, at 22x earnings and more than 30x GAAP earnings, this market is very expensive...and thus it doesn’t have the same to potential to rally further like it did 2.5 months after the bottom in 2009 (or 2000...when it had retraced less than 20% of the decline in the months following the lows). With most the Year-over-Year data telling us we’re not going to return to pre-pandemic levels of growth any time soon, those who believe that Fed liquidity ALONE will keep the market rallying from current levels had better be correct...because the stock market has run MUCH, MUCH, MUCH further and MUCH, MUCH, MUCH more quickly than it did after the last two crises.
The futures are trading higher this evening...after a wild night of trading in the futures. It looks like the Trump Administration wants to play the same game they did last summer...by rotating back and forth between being tough on China...and talking bullishly about the trade deal (and its impact). However, since last night’s attempt to “be tough” blew up in their face and caused the stock futures to fall out of bed, this exercise merely gave China more confidence that Trump will not do anything to hurt the stock market...and thus the Chinese can to take advantage of this situation and push hard on issues like Taiwan, Hong Kong, India, etc. HOWEVER, if China pushes too far, the entire thing could actually turn the situation where Trump will gain more political ground by pushing hard against China...EVEN if it hurts the stock market. So the issue of U.S./China relations could very easily become an big one between now & November.
Last week we highlighted that a mild divergence has been developing between the stock market and the high yield market. This continued yesterday as the HYG fell by a slight amount...while the stock market experienced a solid rally. The divergence is still a small one, so we do not want to send up a warning flag on this issue yet. However, we’ll be watching the HYG pretty closely going forward......The 200 DMA has been solid resistance for the HYG this month, so a break above that level would take this issue off the table. It would be particularly bullish for the high yield market if it also broke above the 85 level...thus giving it another “higher-low/higher-high” sequence......Again, we don’t want to make too much of this issue right now, but it is one of several items we’re keeping a close eye on at this critical juncture in the market place.
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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