By Callum Keown
Any near-term bounce from a new fiscal plan is likely to be “short-lived,” according to Miller Tabak & Co’s lead strategist Matt Maley.
Maley said Trump’s positive COVID-19 test improved the chances of a new stimulus boost, as it gave both sides the opportunity to concede ground without losing face.
However, he warned multiple factors meant any pop fueled by a deal would be brief.
“We believe an agreement on a new fiscal plan is likely, but we’re not so sure it will help the stock market rally in a sustainable way. The market is still quite overvalued and the combination of the weakening employment picture plus a second wave of the virus does not bode well for any improvement for the ‘E’ part [earnings] of the P/E ratio going forward,” Maley said.
“More importantly, history shows us that stimulus programs play a much bigger role as a catalyst for a strong/sustained rally when the stock market is flat on its back…not after a strong six-month rally,” he said, noting that the S&P 500 /zigman2/quotes/210599714/realtime SPX -2.45% was still more than 50% above its March lows,” he said.
He added that another “down-leg” to the September correction will come in October before we see a sustainable rally in stocks.
But the strategist said Miller Tabak & Co one important indicator — chip stocks — would signal whether they were wrong. “The chip stocks have been a very important leadership group for the broad stock market, so it’s action over the coming days and weeks should be vitally important.”
He said if the SMH semiconductor ETF /zigman2/quotes/200571902/composite SMH -5.58% can break above its September closing highs of $183.55 it was “very, very bullish on several different levels.”
“If that happens, we’ll have to change our tune rather quickly.”