What Financial Markets Are Telling Us: Shallow Optimism Will Recede As The Normal Tide of Autumnal Pessimism Rushes In

Despite gloom in Europe and concerns about food and climate changes this winter the equity markets are stepping higher and giving consumers extra reasons to keep spending through higher prices and transportation nightmares. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. 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 was also one negative factor across global asset classes. Oil is pointing to declining global GDP expectations. Expect the S&P 500 to rise modestly over the next few days before falling steeply by mid-month as realism accompanies the return to school and work.

Financial markets reveal the lack of conviction among global investors, the business community and centrist political leaders across the world. There is simply nothing leaders can do to solve the food, energy and logistics problems plaguing the global economy that’s consistent with their self-interest. Because the elite are helpless the markets focus on global consumers and take heart that people are turning into Americans nearly everywhere, the yield of 40 years of intense globalization. As long as the Chinese, Indian, Brazilian, German, Italian, French and British consumer continues to borrow and spend in revenge against the pandemic the global economy will slowly grow and that’s making investors complacent about equity valuations.

Consequently equity derivatives were bullish even in the depths of the June swoon and continue to point markets higher as August lazily unfolds. Giving the markets added lift is the divergent trends in commodities, which point to gradually declining inflation. Fossil fuels are moderating but unlikely to drop much more, ags and softs have moderated but have yet to break their downtrends, meats are in soft uptrends while metals are establishing nice uptrends after their deep swoon. As commodity inflation returns to normal the markets are betting that front-loaded interest rates increases will do the trick and force central banks to lower rates in 2023, making equities appear worth the risk of holding through the Autumn.

But I believe this Autumn will be like nearly all before, where equities markets fall and uncertainty reigns supreme. Key is bond market volatility, which is still trending high while both govvies and high-yield corporates are likely to retest interest rates highs from earlier in the year. As rates rise equities will fall and that should present a genuine buying opportunity for the winter.

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