I’m hearing more talk among the so-called market cognoscenti - whose main qualification seems to be that they know nothing about nothing and even less about markets - that stocks could fall another 15-20%. This is consistent with my view that the Fed is going to have to raise interest rates higher and keep them elevated for a longer period of time than the consensus forecast earlier this year. That is not a good set up for stocks.

The culprit for this is stickier inflation. The disappointment markets felt when August inflation came in higher than expected despite a ~30% drop in gas prices betrayed a too narrow view of inflation. Healthcare and shelter (housing) costs kept prices more inflated than expected and food prices remained stubbornly high. Service prices are also stuck at higher levels. This in not in any way “transitory,” a word that should be banished from the lips of central bankers and economists after it was used to try to lull investors into ignoring long-term trends that were pushing prices higher for years (green energy policies, lax antitrust policies, higher wage policies, to name just a few).

The overall thrust of progressive economic and social policies and undisciplined fiscal policy weighs heavily in favor of sustained higher prices. The Fed can raise interest rates all it wants without impacting these forces pushing inflation (borrowing a phrase from the lesser thinkers in the market) “to the moon.” Prices won’t keep circling the moon (though it may not seem that way in Europe for a while) because high prices are self-correcting, but they will take longer to return to earth than people think. That leaves us with “higher for longer” interest rates and brings us back to stock prices.

Stock prices were far too high at SPX 4800. They closed today at 3873 which is still too high for a Federal Funds rate expected to climb to ~4.25% (or higher?) and earnings expected to weaken further. The next stop on the index is likely in the 3400-3500 range and then we will have to see where earnings and rates settle out (watch 2-year Treasuries). I heard someone on television the other day (in a rare weak moment I turned on CNBC, probably to relish the 1200-point drop on the Dow that day) say 2023 S&P earnings would come in at $243. Even with all the bogus non-GAAP earnings adjustments used to goose earnings, that seems pretty high to me. I expect earnings to come in between $200 and $220 in 2023, leading me to stick with my S&P 500 target in the low 3000s.

The real question is why anybody would find the market attractive at this particular point in time. This is a market to rent, not own, or to short if you have a strong stomach and the right skill set, or to avoid until further notice.