The Latest On The Global Economy: Confidence Stays Strong Despite Market Swoons And Powell’s Trial Balloons

Fed Chairman Jerome Powell gave the markets a growth scare this past month but the real economy has barely budged, signaling that profit growth isn’t at risk and investors should continue buying the dips. The volatility risk premium points to a higher market over the next few days (though volume may be light not only because of seasonal norms but that the VRP could easily reverse and catch investors offside), while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought one positive factor for US stocks. Copper's chart is signifying global growth. But there were also several negative factors across global asset classes. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days.

While fears of a Fed policy mistake have sent markets through much of December, the divergence between central banks around the world shows that a policy mistake is unlikely since monetary leaders compete with one another and are generally independent, thus highly likely to be objective. The Fed’s recent capitulation on the “transitory” vs. “permanent” inflation issue is likely to be reversed as the major central banks are easing rather than turning hawkish. The ECB is still dovish and explicitly says inflation risk is not to the upside but the downside after the current supply chain issues iron out. Rising European power prices are likely disinflationary after the initial bump to inflation, and on this score the permanent antagonism with Russia means future EU growth is suspect until alternative energy sources are found. The PBOC is easing as forecasts for 2022 growth fall (even the World Bank has joined in with a forecast of just 5.1% growth in 2022) and the real estate market continues to convulse and raise the possibility of a hard landing and contagion risk across Asia and possibly the West. Jerome Powell clearly leans towards being dovish and some good news on inflation in 2022 will be all that is needed to wipe out fears the Fed’s terminal interest rate will be higher than its inflation target. Since inflation has been so high already future inflation data will reflect the high “base rate” of 2021, and so disinflation is more likely than sustained inflation. That’s a bullish backdrop for equities and supports the forecasts of bottoms-up analysts that see 8% earnings growth in 2022 for the top 100 stocks in the S&P 500.

The risks to the global economy are primarily geopolitical as long as the Fed conforms to the dovish views of other central banks. Despite the games Russia plays European confidence is still above early 2021 levels and most diffusion indices in the US are positive despite Biden’s low approval ratings and the recent Fed tilt to the hawkish. The rise of Joe Manchin at the expense of far-left democrats helps alleviate the risk of mounting statism, though this is still a major risk factor in Europe and Asia. Geopolitical shocks will come but unless they are major game-changers these shocks will create buying opportunities in equities.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), Titan Machinery (TITN) and a small net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).