August 22, 2020

Business ‘Unintended detrimental consequences’: A former Wall Street chief strategist says the Fed has driven flimsy stock-market highs that will come crashing down — and warns bullish day-traders will be futile to stop it


  • Peter Cecchini, the CEO and founding father of AlphaOmega Advisors and weak world chief market strategist at Cantor Fitzgerald, thinks the Federal Reserve has backed itself into a nook thru the implementation of 0% interest rates and limitless quantitative easing.
  • Lofty market valuations and the emergence of a fickle retail shopping and selling enhance add gasoline to his bearish outlook.
  • “It be no secret I have been bearish of the S&P 500 since about 3,000,” he acknowledged.
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When the market hits fresh all-time highs — admire it did earlier this week — investor sentiment can in general be sequestered into one of two groups: (1) Stocks are going to the moon, or (2) Right here’s going to come crashing down.

It be safe to converse that Peter Cecchini, the CEO and founding father of AlphaOmega Advisors and weak world chief market strategist at Cantor Fitzgerald, identifies with the latter. 

“With the S&P 500 pushing into a fresh excessive and with even longer-dated yields now already near their zero hasten, it is terribly acceptable to request whether or now no longer the Fed’s dive off the bedpost to hundreds of QE can proceed to begin equities additional into outer space,” he penned in a fresh client display camouflage. “It be no secret I have been bearish of the S&P 500 since about 3,000.”

He continued: “For several reasons, I proceed to preserve this look with out reservation.”

On the forefront of Cecchini’s consideration lies the market’s valuation. At this time, the S&P 500 is churning on the loftier facet of its historic average.

And he’s now no longer going to be caught picking up nickels in entrance of a steam roller.

“First, threat versus reward is extremely deplorable at in the intervening time low valuations,” he acknowledged. “I don’t admire risking four bucks to device one. For that motive, I will fortunately forgo the most contemporary 10% in sizable caps and 5% in small caps.”

Cecchini’s glean on market valuations echos that of John Hussman — the outspoken investor and weak professor who’s long been predicting a stock give diagram. 

The manner Hussman divvies it up, investors are in the intervening time wrestling with “the most low valuations in historic previous, which proceed to signify a two-thirds loss in the S&P 500 over the completion of this cycle.”

Adding to Cecchini’s melancholy legend is a swarm of retail traders.

In conserving with Joe Mecane, the head of execution products and companies at Castle Securities, retail traders legend for roughly 20% of every day market task. In Cecchini’s mind, the exuberance of a retail soiree can ideal closing so long.

“2nd, I regard uninformed WFH retail flows — emboldened by huge, non permanent fiscal stimulus — as insufficient to preserve the rally,” he acknowledged. “The equity markets are in actuality admire an passe elevator manner over capability. It be factual a topic of time ahead of the cable snaps and its passengers prove in the basement.”

With all of that established, Cecchini thinks that the Federal Reserve has speed out of levers to drag, and will seemingly be doing more distress then honest.

“It has helped some corporations remain solvent for now… nevertheless there may perchance be nothing left for the Fed to kill — short of becoming the Financial institution of Japan’s twin,” he concluded, referencing a central bank that makes billions of bucks of annual equity purchases in an strive and stabilize their markets.  

“The Fed’s formulation to ‘lend’ in an infinite trend is arguably as flawed because the conception that of infinity itself,” he acknowledged. “Most importantly, the marginal advantages of this form of policy are extraordinarily restricted and may perchance perchance well moreover possess unintended, detrimental penalties.”

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