Morning Comment: Inflation will be higher for longer and that's not good for risk assets.

Don’t you just love the sell-side of Wall Street? There seems to be an unwritten rule that you cannot call for a recession unless we’re already well into one (or sometimes, not until it’s already over). Instead, they say that they “don’t expect a recession THIS YEAR”…or “The odds of a recession are growing.” Our favorite new ones is, “we are now looking for a growth delay.” A growth delay? How can anybody be expected to be taken seriously when they use that kind of language???.....We even have some people saying that we’re moving into a “technical recession”…implying that it’s something that won’t be as bad for the markets as a “real recession.”

Of course, it has been our long-held contention that it did not matter for the stock market whether we fall into a recession. As we have been saying since last year, given that the market had been pushed to grossly overvalued levels by global bank liquidity, we did not need a recession…or even a slow down in growth…to cause the market to fall 15%-20%. All it would take, we said, was a removal of that liquidity to cause a deep correction in the stock market……However, we also said that a fall in the stock market would create a slowdown in growth…and thus we thought the decline could be more than 20%. NOW, with the development of the war of attrition in Ukraine…and the much higher (and much more sustained) level of inflation creating an even bigger slowdown in growth…the downside potential for the stock market is even bigger.

What we’re trying to say is that it didn’t matter at the beginning of the year that most of Wall Street was wrong about their growth forecasts for the economy…and whether we’d have a recession or not. It was inevitable in December of last year that the stock market was going to fall hard in 2022 due to the fact that the Fed was going to aggressively reverse their monetary policy from an historic stimulative one…to quite hawkish one. HOWEVER, NOW THAT THE MARKET HAS SEEN THAT 15%-20% DECLINE, IT HAS BECOME VITALLY IMPORTANT THAT WALL STREET GETS THEIR ECONOMIC FORECAST CORRECT……Everyone is finally admitting that we’re seeing a serious drop in growth, BUT IF they want to be able to tell investors how far their investments in risk assets can drop, they DO have to get the growth prospects for the rest of this year and the first half of next year correct……So far, most have fallen well short.

Anyway, the stock futures are trading down in a substantial way this morning…as inflation fears have risen considerably since Friday morning’s CPI data hit the news-tape. Over the weekend, many pundits admitted that we have not reached peak inflation yet. More importantly, many have also finally admitted that when inflation does come down, it will stabilize at a much higher rate than anything we’ve seen in 40 years (which is something we’ve been saying all year). Therefore, “lower inflation” will not mean “low inflation”…and given that inflation is not good for most risk assets (stocks are not an inflation hedge)…the realization that inflation is going to stay “higher for longer” is pushing the market lower this morning.

After the big declines of the past five and a half months…combined with the big decline we’ve seen over the past three days (we include this morning’s drop in those three days)…means we could get some “forced selling” today. With S&P 500 down more than 8% over these three days…on top of the losses it has already experienced this year…it’s not a stretch to think that more investors will get some margin calls today. Of course, there are other kinds of “forced selling” that can take place. As we saw in 1987, mutual fund redemptions can create some “forced selling” as well…and with the fear of inflation spreading in a significant way, there’s certainly a reason to think that well see some redemptions this week as well…..On top of all this, one cryptocurrency lender (Celsius) is putting a pause on withdrawals, swaps and transfers…and thus we’re getting some panic in the crypto market this morning. (Remember, the big decline in the stock market during May was at least partially fueled by margin calls in the crypto market. When investors could not sell enough cryptos to meet their margin calls, they sold what they could sell to raise the needed cash…and that included stocks.)

We’re just two days from the next Fed announcement and press conference. There are calls for the Fed to raise rates by 75 basis points this week…or even 100 basis points. The Fed has tried very hard in recent years to make sure their moves are very well telegraphed. Therefore, that would seem to mean that they’ll stick with the 50-basis point hike. If they want to be more aggressive, they’ll signal that they’ll be open to bigger hikes in the future. HOWEVER, this does NOT mean that there is no way the Fed will surprise the markets with a bigger than telegraphed hike. Therefore, it’s not out of the question that the Fed could give us a big surprise this week. (Maybe it could give us a “buy the news” reaction at some point this week. The more serious attack in inflation MIGHT give investors some confidence that it will come down more quickly.)

In other words, this bear market (like all bear markets) will not come in a straight line. However, given that investors are finally coming to the realization that inflation (and stagflation) is going to remain with us for a lot longer than most of Wall Street has been saying…and that when it does stabilize, it will do so at a much higher level than we’ve seen in decades…the line of least resistance for the stock market will likely be lower for many months into the future.

Right now, as we write this morning, the S&P futures are indicating that the S&P 500 cash index will open very near its intraday lows from May. That level comes-in at 3810, so whether it can hold that level or not should be important how the next few days go in the stock market. However, the reaction to the Fed announcement and their press conference will be the most important event of the week. No matter what happens after the Fed meeting, we worry that “forced selling” (or just normal selling) could push the S&P below 3810 in any meaningful way. If (repeat, IF) that happens, Wednesday’s Fed announcement/press conference could come with the S&P much even lower than it’s already trading this morning.

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.

Posted to The Maley Report on Jun 13, 2022 — 8:06 AM
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