What Financial Markets Are Telling Us: Persistence Pay Off In Above-Average Rewards

Corporate earnings are weathering the slowdown in the global economy wracked by Omicron with aplomb, and that’s keeping equity markets near all-time highs. The volatility risk premium points to a higher market over the next few days (though volume may be light since 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. Oil's chart is signifying global growth. But there was also one negative factor across global asset classes. The US yield curve is bear steepening. Expect the S&P 500 to rise modestly over the next few days.

Equities have resumed their climb as evidenced by the low volatility of volatility (VVIX index) and the return to hedging (SKEW index), both of which indicate the bulls are complacent to own this market and expect meaningful returns since they are willing to pay to protect against a downturn. Bond market volatility has eased and short-term interest rates look to settle around current highs, which also makes equities relatively attractive. The mild upturn in copper and steep upturn in oil point to modest but persistent global growth, and the modest rise in gold points to the same along with a modest drop in the $US and a concomitant rise in inflation. All of these modest trends support corporate profit growth, which is expected to be around 8% in 2022, a good heuristic for expected equity returns.

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).