The stock market saw some nice upside follow-through from Friday’s rally…and it came on good breadth (7 to 1 positive for the S&P 500 and 6 to 1 for the NDX 100)…and solid volume. (Yes, the composite volume fell by 38%, but that’s only because Friday was an expiration day. The volume was still over 5bn shares yesterday, so that is still quite good.) However, we’re seeing a reversal of much of those gains this morning…as concerns over a recession and increased tensions about the situation in the Taiwan Strait are creating headwinds this morning.
One item that stood out to us yesterday was the underperformance of the HYG high yield ETF. This market has been an excellent indicator for the stock market in the past, so the fact that it fell on a day when the stock market was so strong caught our attention. Having said this, we do admit that the correlation between the stock and high yield market has not been one that has involved a tick-for-tick movement. Sometimes, a mild divergence develops. Therefore, this could be a situation where the high yield market bounces to get back in line with the stock market…rather than the stock market rolling over soon. However, given this morning’s weakness in both markets, it looks like it could be the other way around. (HYG chart from yesterday is attached below.)
Needless to say, Chairman Powell’s testimony before Congress today should have an important impact on the markets. (He does testify tomorrow as well, but whenever he gives his two-day semi-annual testimony, the second day tends to be something that provides little new-news.) Given what Mr. Powell said in his recent press conference, we find it hard to think that he’ll say anything that is overly dovish. Thus, we’re not looking for a bullish catalyst from this testimony. That said, one never knows, so we’ll see what he has to say this morning. (His testimony begins at 9:30 today.)
We got another very interesting opinion piece for Bloomberg News from former NY Fed President Bill Dudley this morning. In it, he said that the U.S. is headed for a hard landing…and that “a recession is inevitable in the next 12-18 months.” As we have said many times, the NY Fed President is usually the second most important person at the Fed, so to hear this from the most recent NY Fed President is quite alarming. This is especially true given that he also said that the Fed is more focused on pushing inflation down than supporting economic activity. To repeat, Mr. Dudley that the Fed is “More focused on pushing down inflation than supporting economic activity.” He went on to say, “The focus on price stability will be relentless.”
In other words, the most recent person to hold the second most important job at the Fed…and held it for nine years…is basically telling us that the Fed does not care if we go into a recession. They believe that is it something we have to go through in order to get inflation under control…(so that the upcoming (inevitable) recession does not become an even worse one than it would be if inflation was able to continue to run wild).
Those are not our words…they are Mr. Dudley’s words! HE used the words, “inevitable recession”…and HE’S the one who said that continued high inflation would make the recession worse. Yes, we agree with Mr. Dudley on these concerns, but we want to make sure that you know that these were HIS words…and not just our interpretation of his commentary…….…In other words, Mr. Dudley is warning us that a recession is the price we will have to pay to win the necessary battle over inflation. Considering that even the biggest stock market bulls will admit that their bullish stance depends on no recession, this is not a good situation for the stock market as we move through the rest of the year.
We’ll finish today’s piece by quoting Mr. Dudley one more time. We thought the final words of his opinion piece were astonishing…given how important his former job was at the Fed. He said, “Much like Wile E. Coyote heading off a cliff, the U.S. economy has plenty of momentum, but rapidly disappearing support. Falling back to earth will not be a pleasant experience.”……….WOW, stop beating around the bush, Mr. Dudley, tell us what you really think!
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.