The Latest On The Global Economy: Cross-Currents In Economics And Politics Spells Higher Equity Prices
The latest read on consumer inflation is stoking the markets higher this morning, as the trajectory of lower inflation down the pike mirrors the Democrats’ political prospects. 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 several positive factors for US stocks. Copper's chart is signifying global growth. The action in EM currencies indicates the $US is somewhat weak. But there were also several negative factors across global asset classes. Oil is pointing to stagflationary conditions. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days.
Inflation is high now but signs from China suggest globally it’s set to moderate, while base effects will start to foster disinflation in the US by the spring. That doesn’t help Joe Biden, who looks set to lose the House come November as workers are not getting much benefit from all the policies enacted in 2021. The political momentum for Biden having slowed and fears of low Democratic turnout giving the GOP control of the House mean US growth is almost certain to fall back to 2% and less through 2024. While investors may fret that the GOP could then sweep in 2024, it seems more likely that the divisions between Trump supporters and GOP discontents hands the Democrats another presidential win, giving us divided government for the foreseeable future. That’s a significant positive for equities, which is being discounted right now as the market consolidates at high valuations close to all-time highs.
Europe continues to trudge along with risks to the downside due to the concerns that Italy could backslide from sensible and market-friendly policies, and Boris Johnson reeling. But plainly this is no different from Europe’s experience since the GFC. Japan is similarly trudging along with the global economy, while diffusion indices across the developed world are still positive despite inflation. That leaves China as the big question mark, and investors are betting Xi Jinping will be satisfied with the market reaction to his latest cultural proclamations, and not veer further to the left or force the PBOC to stray from prudential policies.
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), Starbucks (SBUX), Titan Machinery (TITN) and a long position in the S&P 500 (via the levered ETF UPRO) as yesterday I sold out of my short position (the levered inverse ETF SPXU).