Stocks Surge on Hopes for Stronger Economy, Weaker Inflation

By Victor Sperandeo with the Curmudgeon


Introduction:

We assess the markets, economy, and inflation in this post with selected quotes from BofA Global Research, Sentiment Trader, and Jeremy Grantham.

Victor opines on the negative implications of the DoJ/FBI raid on x-President Trump’s home.  The Curmudgeon agrees that the resulting political tension and divisiveness will be very bad for the U.S. in every conceivable way.

Market Comments:

The U.S. stock market has rallied four weeks in a row and is now overbought.  Here’s a quick recap:

Based on historical precedents, we are now due for a pause and profit taking. The volume last week was low to moderate, which implies that we’re experiencing a bear market rally (volume has not confirmed price action), rather than a new bull market.  However, this remains an open question for now.  We assume it’s a bear market secondary correction, i.e., a counter trend rally, primarily due to short covering.

One of the reason stocks did well, while bonds were sold (bond prices fall as yields rise), was due to the (bogus) BLS non- farm payroll employment report.  [We explained that in last week’s column.]

The markets have assumed that the U.S. economy is not in recession.  Time will tell if that’s true.

Curmudgeon Follow-on Comments:

The U.S. stock market is still overvalued.  The P/E ratio of the NASDAQ 100 has soared back to levels that put the index back into expensive territory on a historical basis. That ratio is now 24.9 times 2022 earnings estimates, which is one standard deviation above its historical average since the middle of 2009 and the average of 20.2.  Also, many like BofA Global Research, believe that 2022 earnings estimates are way too high.

Jason Goepfert of Sentiment Trader wrote:

·        Some models have cycled back into optimistic, or greedy, territory. 

·        Small options traders are betting on a rally again.

·        The Fear & Greed model has cycled from maximum fear to extreme Greed!

·        Dumb Money Confidence is extremely optimistic and Smart Money Confidence is neutral. This suggests an excess return of 
-1.1% over the next 2 months.

Meanwhile, the earnings yield for the NASDAQ 100 has risen to around 4%, which means that the spread between real yields and the NASDAQ 100 earnings yield has narrowed to just 3.65%. That spread between the NASDAQ 100 and real yields has narrowed to its lowest point since the fall of 2018.

Also, the Fed’s Quantitative Tightening (QT) will be increased in September which will tighten financial conditions as the money supply will decline due to the runoff.

Finally, Long term bear Jeremy Grantham, co-founder and investment chief at asset management firm Grantham, Mayo, & van Otterloo, says “In terms of the entire bear market, it would be unusual for it to bottom out anywhere near this high. I would expect that by the low, the S&P would have declined by 50% from the peak in real terms."

U.S. Economy and Inflation: 

The Atlanta Fed GDPNow “running estimate” for the 3rd Quarter 2022 increased to 2.5% – up from 1.4%.  That’s probably due to last week’s misleading BLS jobs report. 

It will be interesting to see how the BLS will reconcile the 1 million extra “seasonally adjusted” jobs (or the made-up number to smooth the real data) from the real jobs numbers (which are not seasonally adjusted) by the end of this year.  At that time, the two numbers must balance. What finagling will the BLS do to make that happen?

The basic economic news is what investors and traders should focus on leading up to the Fed’s annual Jackson Hole pow-wow (boondoggle?)  in late August.  Till then the Fed will likely be talking the markets down with threats of raising rates. Again, the reason for that talk the talk is to lower inflation via a “reverse wealth effect.”

My view is that the economy will be very weak, while the CPI continues to decline. This is critical to the Fed’s actions before the election.

BofA Global Research Expects Lower Inflation:

BofA’s Global Proprietary Signals, a compendium of proprietary indicators that range across different economies, strategies, and markets, make a strong case for lower global inflation. This report, which monitors 37 proprietary growth indicators, ranging from US trucking to Japan factory automation, came out the same week US inflation dipped.

The leading indicators we observe provide support for moderation with easing supply pressures, weakening demand, collapsing money supply, declining prices, and falling expectations. Supply side pressures show evidence of easing with the Global Supply Chain Pressure Index declining and the Global Manufacturing PMI Suppliers' Delivery Times improving. Key components of headline inflation, including food and energy are also at an inflection point. Both Wall Street and Main Street now expect inflation to moderate, with BofA expecting CPI to slow to 5.4% in 1Q23.   Fed Funds futures imply Fed rate hikes will end this year and with a steady downtrend in growth indicators, we remain defensive.

Implications of the DoJ/FBI Search of Trump’s Home:

The raid by the DoJ/FBI on Donald Trump’s Mar-a-Lago home in Florida (looking for some classified and secret documents) has created a tipping point problem between the people and a U.S. political system in which the state has substantial centralized control over social and economic affairs.

Former President Trump is under federal investigation for possible violations of obstruction of justice and the Espionage Act, which makes it unlawful to spy for another country or mishandle U.S. defense information, including sharing it with people not authorized to receive it, a search warrant shows.   In a statement on his social media platform, Trump said the records were "all declassified" and placed in "secure storage.”

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Source:  The Week

Like the tort of abuse of process, its elements include intentionally instituting and pursuing a legal action that is brought without probable cause and dismissed in favor of the victim of the malicious prosecution. In some jurisdictions, the term "malicious prosecution" denotes the wrongful initiation of criminal proceedings, while the term "malicious use of process" denotes the wrongful initiation of civil proceedings.

This raid can lead to some big problems. A raid on an x-President’s home has never been done before in U.S. history. 

A person close to Mr. Trump reached out to a Justice Department official to pass along a message from the former president to the U.S. attorney general.  Mr. Trump wanted Mr. Garland to know that he had been checking in with people around the country and found them to be enraged by the search.  His message was, “The country is on fire. What can I do to reduce the heat?” 

The Curmudgeon (no fan of Trump) equates this incident to the DoJ/FBI being oblivious to the contentious, violent climate in the U.S. today.

Indeed, the resulting political tension and divisiveness will only make things worse for the U.S., which is already in a steep decline.  The country will continue to deteriorate, and that will adversely affect the economy and financial markets. 

Victor’s Opinions:

This incident smacks of incipient fascism, teetering on the edge of totalitarianism. That is what we are experiencing now. Was it really a raid on Donald Trump?  No, it was a raid on you, me, and everybody who likes freedom. It was a message like this: "We can get you, and we will get you if you dare stand up to the garbage establishment of incompetent, corrupt losers who failed at literally everything they've done."

End Quotes:

With respect to the creeping fascism in the U.S., here is a famous poem by a Lutheran pastor in Germany during the Nazi’s rise to power:

“First they came for the socialists, and I did not speak out—because I was not a socialist.  Then they came for the trade unionists, and I did not speak out—because I was not a trade unionist. Then they came for the Jews, and I did not speak out—because I was not a Jew. Then they came for me—and there was no one left to speak for me.”

—Martin Niemöller

Here’s a quote on the abuse of judicial power by Patrick Henry:

“Power is the great evil with which we are contending. We have divided power between three branches of government and erected checks and balances to prevent abuse of power. However, WHERE is the check on the power of the judiciary? If we fail to check the power of the judiciary, I predict that we will eventually live under judicial tyranny.” --→ Henry called the future like he was Nostradamus.

Thomas Kidd wrote about why Patrick Henry did not sign the Constitution:

“Patrick Henry thought that a national government invested with the unlimited power to tax and spend would inexorably transform into a monstrosity, one that the Founders—even Madison—never intended. Most Americans believe that the Constitution, at least as originally designed, fostered a wise system of checks and balances that divided power between the states and national government (he was thinking here of the Articles of Confederation). But when you consider the titanic government we have today, and the struggles to contain our mind-boggling rates of federal debt and spending, Henry’s warnings about what the government under the (new created US Constitution mainly influenced by Hamilton) could eventually become seem more and more reasonable.”

In terms of history and the markets, Patrick Henry said it perfectly in his predictions as an avid student of history:

“I have but one lamp by which my feet are guided, and that is the lamp of experience. I know no way of judging of the future but by the past.” ...Patrick Henry

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Be well, stay healthy, try to find diversions to uplift your spirits. Wishing you peace of mind, and till next time………

 

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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