Powell's Rate Pause Won’t Save Stocks

Jerome Powell threw Wall Street a lifeline recently when he decided to temporarily take a pause with the Fed’s rate hiking campaign. The Fed Head also indicated that the process of credit destruction, known as Quantitative Tightening, may soon be brought to an end.  This move towards donning a dovish plume caused the total value of equities to soar back to a level that is now 137% of GDP. For some context, that valuation is over 30 percentage points higher than it was at the start of the Great Recession and over 90 percentage points greater than 1985. So, the salient question for investors is: will a slightly dovish FOMC be enough to support the massively overvalued market?

The S&P 500 is now trading at over 16x forward earnings. But the growth rate of that earnings will plunge from over 20% last year to a minus 0.8% in Q1 of this year, according to FACTSET. It might have made sense to pay 19x earnings back in 2018 because it was justified by a commensurate rate of earnings growth. But only a fool would pay 16x or 17x earnings if growth is actually negative?

The only reason why that would make sense is if investors were convinced EPS growth was about to soar back towards the unusually-strong rate of growth enjoyed last year. And for that to be the case several stars have to align perfectly.

The structural problems that are leading to sharp slowdowns in Europe, China and Japan all have to be resolved favorably and in a very short period of time. And, of course, global central banks begin another round of massive and coordinated of QE.

In addition, the trade war must also be resolved quickly and in a way that does not inflict any further damage to the ailing economy in China. Not only does China have to agree on a myriad of concessions; including eliminating its trade surplus with the U.S. and renouncing its practice of intellectual property theft. But the communist nation must also agree to subject itself to rigorous monitoring and enforcement mechanisms. Not only this, but any eventual deal must be constructed in a way that ensures increasing China’s dependence on imports does not negatively affect domestic production.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, more

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