The Latest On The Global Economy: Stagflation Is Going Viral Like COVID

The equity market is disconnected from economic and political news and that signals a correction is likely in the near future. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. Expect the S&P 500 to be range-bound as the market digests yesterday’s political news and decides if it’s as bearish as first impressions augur.

The democrat’s quick fall from grace can only mean a smaller stimulus as Biden will be held largely to blame. With growth already slowing that will cut into earnings estimates, which are already getting volatile due to supply chain problems. And the global economy is adding further worries despite market rallies in Europe and EM.

China is slowing at a stable pace as evidenced by its PMI but the worrisome issue is the rising number of new COVID cases despite the government’s draconian policies. This could further harm global supply chains and lead to persistent shortages and inflation. Europe is softly slowing too but this is even more worrisome as Europe lacks the fundamentals for growth that could make this feel temporary, as it does in China. Only Germany and the small Northern European economies have good fundamentals, and Germany is dragging on Europe as evidenced by their composite PMIs.

The political news and PMI numbers haven’t dented market exuberance but the Fed may do so later today. The Fed is about to announce the tapering schedule and this could spook the market even though it’s been telegraphed simply because the wording could include bearish descriptions of inflation. Already the market is expecting near-6% inflation by the next CPI report, yet rates are effectively at zero. So the announcement could catalyze worries of earlier interest rate hikes and that will harm the market since it’s not growth worries but inflation driving rates higher.

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