Stock market has ‘got to fall,’ even if U.S. doesn’t hit recession: Strategist

Miller Tabak managing director and equity strategist Matt Maley joins the Live show to discuss a year-end rally, how a recession will affect bank stocks, economic uncertainty, and the outlook for crypto.

Video transcript

[AUDIO LOGO]

BRAD SMITH: Tracking stock futures, just slightly lower here for the Dow this morning. But the S&P 500 futures and the NASDAQ futures holding on to some slim gains here, as investors look to recover from Monday's selloff, as well as a further year-end rally perhaps here in play.

Joining us now to discuss, we've got Matt Maley, Miller and Tabak and Co. Chief Market strategist. Matt, great to have you here. All right, with the time that we have left in 2022, which has been a wild year to say the least, are we really expecting there to be kind of any strength to a year-end rally here?

MATT MALEY: Well, we certainly could have one. I mean, you always have that fear of missing out type of thing, especially for institutional players. This has been a really tough year. And if you're a portfolio manager, even if you've been keeping up with the market or even outperforming the market, it's been a tough year, right? You know, you outperform, you're still down in most cases.

And if the market rallies into the end of the year and finishes better, and you're sitting there-- sitting on a lot of cash, you're gonna look silly. So they will have to move with it.

But my one concern is that everybody, even it seems like most of the real big bears out there are looking for the market to rally into the end of the year. And that really the big problems are only going to happen next year, so.

And you see with the VIX down below 20 yesterday-- it did bounce slightly back above it. You see that at least on a short-term basis, there's a lot of complacency out there. Again, a lot of bears out there intermediate term, but short term, there's a lot of complacency. So I'm not so sure we're gonna get that rally.

BRIAN SOZZI: Matt, I enjoyed your note this morning. You really took a deep dive into banks and various bank stocks. Now, you had JPMorgan CEO Jamie Dimon out this morning warning again about another potential recession. How do those bank stocks do if we get a recession next year?

MATT MALEY: Yeah, I mean, these bank stocks are not expensive. In fact, many of them are very cheap. But a lot of people compared-- remember at the beginning of the year, they said, hey, the market's very, very expensive but don't worry because it's not like it wasn't in 2000. And it's like, well, you don't have to be the most overexpensive-- you know, the most overvalued ever for the market to go down. And sure enough, it went down.

Same with the bank stocks, people are saying, this is not 2008 all over again. Well, that's great but that was kind of the worst time in the bank since the Great Depression. So it doesn't have to be that bad for the stocks to come down.

I'm not looking for a big problem but, you know, recessions are not good for the-- for banks. And of course, the yield curve, when you have a short-term rates higher than long-term rates, their net interest margins are gonna be pinched. And so again-- you know, and you look at the way the group is starting to roll over a little bit, I'm worried about the stock on a technical basis as well.

JULIE HYMAN: Matt, when you talk about expensive, one of the other reasons that you're not that optimistic about stocks overall is that you think they're still too expensive if you look at the S&P 500. And you wrote some interesting observations about what we've seen in the past before we can exit a bear ral-- bear market, where the S&P 500 typically is.

MATT MALEY: Right, it's one thing is that we have all these different indicators of where is the market bottom gonna be? And has inflation peaked? And stuff like that. Those are interesting comments. But the one thing that has an absolutely perfect record is valuations.

Every single bear market-- now, not every bear market has had a recession since World War II. But every bear market and especially every bear market that's also had a recession, has not bottomed until we got to at least a little bit below 15 times earnings. In other words, got cheap. We never stop at fairly-valued, we always go to undervalued.

And given how overbought and how overvalued we had at the beginning of this year, the chances are that we'll swing even further to the undervalued side before we-- before we bottom out. And let's face it, if earnings are gonna come down-- I mean, right now, the market is trading at 18 times forward earnings and 20 times trailing earnings. If those earnings are gonna have to-- estimates are gonna have to come down, which I think they are, that means we even have further to go.

So the thing is people are worried too much about, you know, what's the economy gonna go further on down the road? Yes, we always want to concentrate on that. But if the stock market is well above what the economy is gonna be six months down the road, it's got to fall even if we don't fall-- even if we don't-- even if we don't hit a recessionary time frame.

BRAD SMITH: Matt, while we've got you, I want to just briefly touch on crypto here because you've been tracking this FTX drama as much as-- [CHUCKLES] as much as the Street has been as well.

We had Shark Tank investor Kevin O'Leary on yesterday who has echoed a lot of the sentiment of many of the people who are waiting for this wash out to actually result in some of the more stable projects that the cryptocurrency space can hang its hat on going forward from here, plus regulation. Now, his position of course, is, in fact, different because he was an investor in FTX. But from your perspective from the outside looking in, where do you believe kind of the shakeout nets out from here?

MATT MALEY: Yeah, I still think it has further to go. And one of the things-- I mean, to be honest with you, boy, it's been unbelievable how well Bitcoin and Ethereum, a lot of these other ones, have held up given the news out of-- out of FTX. I mean, it was already below 20,000 when this took place. We haven't seen that big flush, which I thought we'd got at least more of it.

But you know, this is very, very similar-- I think the comparison a lot of people make to what happened to the internet stocks way back in late 1999 and then of course the early 2000s, where we had so many companies that should not have been in business, they went out of business. The baby was thrown out with the bathwater.

So stock like Amazon actually went down 80% before it, of course, took off. It was the greatest buying opportunity of all time. And I think we'll see that with the best-- with the best cryptocurrencies.

But I do think there's got to be more-- further shake outs. You know, we have these kind of periods of stabilization or even rallies here and there. But I think it's gonna be tough for [? crypt20 ?] to avoid dropping down towards the 10,000 level before it really turns around. We're still in a derisking, deleveraging process.

And what-- maybe the biggest one where liquidity has made the biggest play or the biggest asset class was the cryptocurrency market. So I think that hasn't fully-- this process hasn't fully played out and I think it has to drive-- drop further before we get that great buying opportunity, which we will. It will be a small handful of names but they'll do very well in the long term.

BRIAN SOZZI: Miller Tabak's Matt Maley, always good to see you. Have a great rest of the week.

MATT MALEY: You too.