The Latest On The Global Economy: The Consumer Is Holding Up But They Are Signaling That They’re Close To Exhausted

The bear market rally that began Thursday is fizzling out this morning, but I see the sentiment shift that began last week reasserting itself and sending the market yet higher by Friday. The volatility risk premium points to a higher market over the next few days, 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. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly over the next few days.

A new sentiment has animated traders and investors since Thursday afternoon, namely that a soft landing is possible and consequently valuations don’t need to decline, only earnings estimates. And since those estimates have been cut in half for the current fiscal year this sentiment ramifies into calling Thursday morning the bottom of the 2022 correction. Recent economic data from the US and Europe substantiates this and so do the reassurances of Chinese officials that the bottom is in for both COVID and the Chinese consumer’s expectations. The logic of the argument begins with pent-up demand and the consequent resilience of retail sales and ends with the conservative and prudent actions of centrals bankers from the US to Mexico to India disciplining consumers and workers from overspending, over-borrowing and over-relaxing. Thus consumption and investment will decline but only to reach an equilibrium with rising labor participation, rising employment and the vestiges of pent-up demand, ergo a soft landing.

I see this sentiment fizzling out as the risks to further declines in global growth form an unholy marriage with the geopolitical risks that a cornered and angry Vladimir Putin makes a nuclear demonstration to prove his worth. Consumer sentiment by some measures is so far down that the poor results from Wal-Mart and Target look reasonable, and the future even worse. I see the decline in consumer expectations invigorating the bears next week, and the market making new lows at around S&P 3700. At that point valuations will have come down enough to warrant a genuine bull market, assuming nothing atrocious on the geopolitical stage actually materializes.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO