The Worsening Challenges Of Unity Explain Difficult Choices For The Parties And Investors Alike: The Action For October 12, 2023
The Times showcases the untenability of American unity in these fractious times this morning, leading with Israel’s unity government following nothing less than the worst violence in decades, and the disunity among New York Democrats and stark differences in public schools run by teacher’s unions and elected officials vs. those by the thoroughly hierarchical Defense Department. The bulls and bears on Wall Street have never been so evenly divided either, with mainstream strategists on every side of the market and leaving the S&P in desultory limbo as we enter earnings season. Huge public deficits and huge fights about defense spending are in America’s future and that spells long-term trouble for equities. The closer we get to a retest of the October lows the easier it will be to sort things out, but for now that is far off into the horizon. The S&P 500 likely rises over the near term, with 2024 likely seeing the resumption of the bear market.
The bulls have control for the moment at the technicals point to mild confidence among the bulls and exasperation among the bears:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
But based on the action yesterday and overnight there are several risks that will soon cool confidence, including:
Economic Data: The latest economic data regarding persistent inflation and a persistently strong labor market is higher than expected, a negative sign for equities
EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.