What Financial Markets Are Telling Us: Complacency Erodes As The World Bears Down On the US Financial Markets

Cascading risks have made for a volatile start to the year in equity markets, but this is soon to change as the bulls follow bond traders and currency traders into capitulation. The volatility risk premium points to a market fall over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. There are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to fall over the next few days.

US equity markets are telling us profit growth is strong but is subject to too much uncertainty for investors to ignore higher interest rates. The relative attractiveness of bonds has led money flows out of equities since March, which along with geopolitical uncertainty accounts for much of the downturn. High current inflation hasn’t affected profits since large firms have been able to pass along prices and keep margins generally even, but this isn’t a sustainable trend since the federal government can’t push more stimulus bills with midterm elections coming up. The risks are on the downside from every perspective, be it geopolitics or the terrible policies in China or potential stagflation in the West (now a reality with this morning’s US GDP report). Consequently the downtrend in equities is strong and I see lower lows until the S&P 500 hits 3700,

Currency markets amplify the risks to global growth. The $US is raging and this means higher inflation and lower growth for many countries, since 40% of global imports are priced in $US. The stronger $US also harms the US since imports become cheaper and exports more expensive, as seen in this morning’s GDP report. As China declines and Europe convulses the US has been one of the few economic safety zones and now that is at risk due to the raging $US. Equity markets can’t ignore these global headwinds and a downtrending market only adds fuel to the bearish fires via the wealth effect on American investors.

Yesterday I took an offsetting position in the inverse levered ETF SPXU, which freezes my exposure to the S&P 500 via the levered ETF UPRO. Consequently my current positions include a large but smaller cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETFs UPRO and SPXU.