Many stocks such as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), AT&T (NYSE:T), Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD) and even some financials such as Goldman Sachs (NYSE:GS) look attractive on a long-term basis based on current valuations. They certainly look quite attractive relative to bonds.
However, in the short or even medium term, stocks rarely trade based solely on their valuation. They tend to trade in relation to the change (delta) of the flow of macro and micro fundamentals. Right now, with systemic risks rising, the net delta of macro fundamentals is swamping all micro or stock-specific considerations.
At least between now and September 30, prospective delta of macro fundamentals is not at all encouraging for stocks.
With consumer confidence collapsing, and markets reeling, economic activity in August should register scary declines. As a result, leading economic indicators such as ECRI could flash a recession signal or approximate such a signal as early as the month of September.
The U.S. has had many recessions over the years - 11 of them since 1945. So what's the big deal about another one?
The fact of the matter is that this historical moment is different. Unlike at any time since 1945 at least, there simply are not enough fiscal resources available nor is there enough political will to counteract the devastating economic and financial impacts that another recession would have at this particular time.
Thus, expectations of recession could have an unusually devastating impact on the equity market for one simple reason: The U.S. cannot afford a recession. Or at least not the U.S. as we know it.
As vulnerable as the economy is in the U.S., things are even worse on the Old Continent. Growth has ground to a halt in Germany and France. With Europe officially on recession alert and financial markets in disarray, European leaders seem to be whistling past the graveyard, as evidenced by the recent Franco-German summit in which the best idea that the summiteers could come up with was to bite the hand they must be fed from by imposing a financial transactions tax.
All of this leads me to reaffirm my view that the S&P 500 is likely to revisit its recent lows around the 1,100 area and ultimately penetrate them. Furthermore, the market has broken down technically, and the recent failure of the equity market to even threaten resistance at the 1,220-ish level on the S&P 500 further supports my thesis that the market is likely to visit the 950-1,020 range.