Just before the Labor Day weekend, I was stunned at the number of economists and market commentators who were warning that markets are teetering just above some giant abyss into which we are about to plunge. Where were they last summer when the markets were at all-time highs and we really were heading over the cliff? Most of them were silent. Few were calling your attention to the extreme readings available for all to see with 94% of stocks above their 200-day moving averages.
A year later and near a bottom, Nouriel Roubini (aka Dr. Doom) of New York University’s Stern School of Business, Niall Ferguson (author of “The Ascent of Money” and a very wrong bull on cryptocurrencies), and Jeremy Grantham (known for decades as a “PermaBear”) are as grim as could be. Mix in “Rich Dad Poor Dad” author Robert Kiyosaki, who stunningly proclaimed last week on TV: “Be careful! This will be the biggest crash in world history … This is the everything bubble.” Morgan Stanley’s Mike Wilson remains on this bandwagon of doom predicting further downside. Universal agreement about the stock market is always wrong.
The key here is what is new in the analysis? So far, nothing! The Fed told us months ago it was going to raise rates to crush inflation, repeatedly and over a short period of time. Chairman Jerome Powell repeats often the Fed has only very blunt tools at its disposal: It can shrink the money supply and/or raise interest rates. Its actions take six months to impact the economy. Mortgage rates are already up about 3% and housing has responded rapidly, just as it should with declining home prices, increased days to sell, and sellers dropping their prices.
Fundstrat’s Tom Lee on CNBC this week importantly observed that the bond market is seeing ahead, before the stock market has, that inflation is already subsiding. Lee expects that within six months inflation will be back toward 2%, the Fed’s goal.
That is also the prediction of my personal favorite economist, Elaine Garzarelli. I have followed her excellent work for decades. Elaine was floored last week when Cleveland Fed President Loretta Mester said she expects rates to be “somewhat above 4% in early 2023 and I do not anticipate the Fed cutting … the rate target next year.”
Rates are currently 2.25-2.50. One more 0.75% increase this month and another in the fall will get you to 4%. If the Fed claims to be “data dependent” it should be cutting sometime next year. The only question is when. Elaine points out that she lived through 1980 and Volcker, as did I, and nobody on the Fed did.
Of course, I checked in with Richard Eakle. He notified me two weeks ago when S&P stocks above their 50-day moving averages had surged from June to over 93%. This is a fast oscillator but can give good warnings. Just two weeks later that number stunningly has plunged to about 30%, an attractive level again. Eakle expects the recent June bottom of 3600 to hold.
Take note of the following readings of stocks above their 200-day averages at the June bottom: S&P 12%, NASDAQ 100 9%, NASDAQ 12%. On Aug. 12 these numbers had all rallied back above 40%. Those numbers are now S&P 25%, NASDAQ 100 17%, NASDAQ 23%, all twice their June levels. This, Eakle insists, is how many corrections end, with corrective backing and filling in a rounding extended bottoming formation. He expects this to take another couple of weeks to complete. He opposes those who believe further lows await. We will know soon enough which camp is right.
Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.
This article originally appeared on Sarasota Herald-Tribune: JOAN LAPPIN: For some economists, market pundits, a bandwagon of doom