Over the Thanksgiving weekend, we ran into a couple who had moved away from New England several years ago, but were back visiting family. We were not close to them, but they are fabulous…people and for some reason I always remembered that the wife used to joke about how she knew that she and her husband were meant for each other very quickly after they met. When they were younger (before they even knew each other), they both loved the shows “Dallas” and “Dynasty”…and they spent hours talking about them on their first date.
When we saw them last weekend and began chatting, I thought about that story and asked them if they liked the shows, “Yellowstone” and Succession.” They both frowned and said they hated those shows. I thought that maybe they didn’t like the actors or something like that, but they said that they thought they were nothing like Dallas/Dynasty. Yes, they admitted that there was SOME similarities (rich families), but they said they were nothing like those old shows.
Maybe those shows meant so much to them that they never want to even consider that any other show could come close to those old classics. Whatever the reason, it shows that sometimes human beings just want to avoid the truth…and thus sometimes they ignore the obvious facts that are staring them right in the face…..For me, I think it is quite obvious that Yellowstone and Succession are almost exactly like Dallas and Dynasty, but I also understand that some people have subconscious reasons for not wanting to accept this reality. (Of course, who cares if they don’t want to see the obvious? This is a situation where it’s “no harm, no foul.”)
Anyway, the stock market saw a major reversal yesterday…as the S&P 500 closed 3% below its midday high, the Nasdaq 3.5% finished the day lower than its highs and the Russell 2000 closed almost 5% below its own intraday highs. The decline came on strong volume of 5 billion shares on the composite volume. (That was below Tuesday’s volume, but it was still 55% above this year’s average daily volume.) We’d also note that the breadth of the stock market reverse significantly as we moved through the day. It went from 24 to 1 positive at 11:30…to 4 to 1 negative by the close of trading!
Big intraday reversals to the downside are a sign that the upside momentum of a rally has lost a lot of steam…and yesterday’s intraday reversal was a doozy. Also, the fact that this big reversal came immediately following a drop of about 2% on two of the previous three trading days…makes the big reversal an even more compelling/dangerous one.
A lot of the blame for the decline went to the news that the omicron variant has been detected in California. However, everyone knew that it was highly likely that this would happen in the U.S. this week, therefore we believe the much bigger reason the reversal was the fact that Chairman Powell did not walk back his hawkish comments from the previous day at all. For example, Mr. Powell reiterated that the risks of persistent, higher inflation “have moved up.” He also said that the Fed is not abandoning the view that the current inflation spike will require a meaningfully different monetary policy response…and that, “We’ll use our tools to make sure this high inflation we’re experiencing won’t become entrenched.”
These comments confirmed that our thinking that the Fed has made a major shift in tone and policy to a much more hawkish stance. This was reminiscent of what took place in the 4th quarter of 2018. Of course, there are differences between now and back then, but there should now be little question that the Fed’s previous strategy of “gradualism” has passed…and that they are going to tighten their policy at a more aggressive rate than they had portrayed a few short months ago (when they officially announced “tapering” back in September). THIS, in turn, means that the level of liquidity in the system is going to become much less plentiful…more quickly…than investors had been thinking just a short time ago.
None of this means that the economy is about to roll-over into recession…or that the stock market is going to fall out of bed between now and the end of the year. However, in our opinion, it DOES mean that the overbought and extremely expensive stock market is going to face some serious headwinds over the coming months (and through much of 2022).
However, in our opinion, this change is an incredibly important one for the markets on an intermediate/longer-term basis…..Think about it. We now have confirmation that some significant changes have taken place in the two countries with the largest economies in the world. First, China shifted from a policy where they encouraged massive increases in risk, debt and leverage (for MANY years)…to one where they are clamping down on all three of these areas in a significant fashion. Second, the U.S. has shifted from a policy of massive monetary stimulus…to one where it is going to come to an end in a few short months…and where interest rates are finally going to start rising shortly thereafter. (From a policy of historic easing…to one a tightening policy.)
In our minds, this should now be something that is becoming quite obvious to most people. However, like it is with those “Dallas/Dynasty” lovers, some people trick themselves into avoiding the evidence that is staring them right in the face. It’s just human nature…….This can be particularly true when it comes to the markets…and to market gurus. As the old saying goes, “It is difficult to get a person to understand something when their paycheck depends on not understanding it.” However, unlike it is with TV shows, avoiding the truth when it comes to the markets is NOT a situation that will eventually be described as “no harm, no foul.”
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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