What Financial Markets Are Telling Us: Hopes May Rise At Jackson Hole But Equities Aren’t Safe Yet

Conflicting signals out of financial markets periodically plague investors and often occur when a pivotal moment is approaching for which there is little if any inside knowledge the smart money can possess. The next such moment occurs tomorrow morning and while bonds are signaling fears of sustained hawkishness there is hope among equity bulls that the recent 4% selloff is a standard-issue buying opportunity as the S&P 500 grinds back to the January 4 highs. I doubt this plays out as 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 neutral to bearish. There are several negative factors across global asset classes. The US yield curve is bear steepening. 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 before falling as September arrives.

Spot volatility for the S&P 500 has fluctuated around the 20% but is set to drop if the consolidation persists through the close of August as I expect it will. Key to watch will be whether the VIX drops as well as this would portend a move higher in equities to challenge the 4400 region. I don’t expect this to happen but the pivotal moment will be Powell’s speech tomorrow, which remains a complete unknown.

Inflation expectations are creeping up again as a key component of inflation is steadying rather than falling, namely commodities. Fossil fuels have started rising again while meats, ags and softs are mixed and industrial and precious metals are valiantly trying to rebound. Given the lag in passing commodity prices through to consumer prices this steadying means not only will inflation persist but disinflation may be far out in the future. This is the key reason I expect Powell to adopt a hawkish timbre which would send equities lower and thus further depress consumers, killing two birds with one stone.

My current positions are a moderate but relatively large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the levered ETFs UPRO and SPXU.