Market Analysis for Wednesday, September 6, 2023

Elevated oil prices, predominantly orchestrated by Saudi Arabia and mirrored by Russia, have emerged as impediments to economic growth. Notably, the U.S. administration, seemingly inclined towards higher retail gasoline prices to expedite the transition to alternative vehicles, has overlooked that electric vehicles (EVs) remain financially inaccessible for most consumers, and concerns about limited driving range persist. This situation, in turn, bodes well for companies like AEHR, which stand to benefit from the introduction of new inverters and processors requiring burn-in testing.

Interestingly, Riyadh wields more influence over inflationary factors than Washington. Nevertheless, the Federal Reserve appears to misinterpret this dynamic, potentially leading to conflicting objectives within the U.S. government. The Fed’s pursuit of lower prices contradicts the White House’s unspoken preference for higher oil prices.

This observation is not intended to be political but rather a statement of the dissonance between policy objectives. This became apparent when the government refrained from replenishing the Strategic Petroleum Reserve during a brief drop in oil prices to the 60s, despite expectations of a subsequent rise to around 80. It raises questions about the motivations behind such decisions.

At present, the elevated price of oil is restraining market activity due to its inflationary impact. Should we witness a market upturn, robust oil-related stocks will bolster the overall market.

While financial media engages in discussions surrounding equity weightings, particularly during the traditionally volatile month of September, I contend that the dominant factors influencing the market are the strength of the U.S. dollar and the trajectory of oil prices rather than debates concerning valuations.

A recent report from the San Francisco Fed warning of “12 years of slower growth” is interpreted by some as bearish. However, I view it as a bullish signal, indicating a recognition of the counterproductive effects of the Fed’s monetary policy decisions on the nation over time, which I have consistently argued would result from an evolving monetary policy that oscillates between meager and excessively high interest rates.

Market Outlook

The market exhibits a neutral tone following the holiday period, with the need for a rally in the S&P index becoming increasingly evident. The potential for a market rally is currently impeded by the movements in oil prices and the dollar’s strength. The coming Wednesday marks a critical juncture for the prospect of a post-holiday rebound within the week.

The production cuts in crude oil by Saudi Arabia and Russia, impliedly endorsed by the OPEC+ coalition, have effectively maintained higher oil prices but have also exerted adverse effects on economic growth and inflationary pressures.

While oil supplies appear abundant, it is crucial to remember that the hurricane season is underway. A severe storm impacting Gulf drilling platforms could quickly drive West Texas Intermediate (WTI) oil prices into the 90s or beyond. Such a scenario would curtail discretionary spending for a significant U.S. population. The Federal Reserve must carefully consider these implications, recognizing that such disruptions would be temporary but still warrant attention from a data-driven standpoint.

If oil prices continue to surge, decreasing consumer spending, the Federal Reserve may postpone interest rate hikes or declare victory. This perspective contrasts with the recent comments from Waller regarding another rate hike. In this context, adverse news may paradoxically be perceived as beneficial for the stock market.

Conclusion

As oil prices surge alongside higher interest rates, disparities between economic classes become increasingly pronounced. Goldman Sachs downplays the risk of a recession. Still, it is essential to acknowledge that a sizable segment of the population remains financially strained, mainly due to prohibitively high living costs.

Small and mid-cap stocks, initially disregarded and struggling to recover, may now be considered viable investments. While erosion is a concern, it may offer more stability than overvalued large-cap counterparts.

The intricacies of multiple valuation issues are beyond the scope of this analysis. Instead, we are examining the possibility of retaining or establishing positions in more extensive stocks as core investments while also considering a selection of smaller stores with potential for innovation, disruption, or profitability.

Expectations point to efforts for a Wednesday rebound, but limitations loom as indexes grapple with the influence of oil prices and occasionally misguided hawkish rhetoric from the Federal Reserve.