What Financial Markets Are Telling Us: The Market is Heeding Led Zeppelin Instead of The Punk Prognosis

The pessimism of the punk rock motto “no future” is being subsumed by bullish optimism that the economic song remains the same. The volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Copper is pointing to declining global GDP expectations. Taken together, the market looks set to overcome any concerns and rise moderately over the next few days.

The song remains the same for US financial markets, only more boisterous since America is outperforming the rest of the world. While the Chinese yuan has paced the $US its equity market is worse off, driven by fears of Xi Jinping’s leftward turn and its impact on corporate profits (seen yesterday in tech stars like Baidu and Bilibili). Europe is projecting its schlerotic essence as evidenced by its vaunted auto sector: while US auto sales are stabilizing and reflecting a possible bottom in the chip shortage problem, EU auto sales still reflect supply chain problems. The rest of the world is seeing slowing growth as evidenced by commodities like copper and Iron ore, and the bearish action in the ¥ is even more troubling in light of expectations for a big Japanese stimulus package tomorrow. For investors to bet largely on robust US growth while the rest of the world slows down amounts to irrational exuberance driven by seasonal bullishness, and I expect this to end by Thanksgiving. A correction driven by fears of leftist policies and across Europe and China and geopolitical concerns out of no-future Russia will provide a buying opportunity heading into 2022.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a small net long position in S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).