Intelligence Gives Way To Division On Israel And Jejune Optimism On Wall Street: The Action For October 19, 2023
Bizarre logic on elite campuses flow predictably with reflexive condemnation of Israel as the Times reports this morning, supplying more proof that common sense is a casualty of the amplified polarization wreaked by the pandemic. The global economy fares no differently as the problems in China and across the West point to intelligent pessimism about future corporate earnings, yet valuations remain high and bullishness in retreat but intact. The S&P 500 likely falls over the near term, as we edge towards the balance of earnings reports and digest the modestly positive news on the corporate front. But the bulls will take any positive news they can get and likely take back control of this market by Halloween and onto Christmas.
The bears have control for the moment as several indicators reveal pessimism on the macro environment. These include:
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.
Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
Long-Term Treasury Rates: Long rates are rising and that will reduce the attraction of equities while cooling the housing and auto industries to the detriment of economic growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Gold Prices: Rising gold prices reflect higher potential inflation but less restrictive interest rates, and concerns about geopolitical risks, which is on net bad for equities.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
But based on the action yesterday and overnight there are several factors that will eventually flip the markets around, including:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps 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.