Global Wall Street Puts Its Foot Down On The Twin Killers Of Inequality And Polarization: The Action For November 2, 2023

While the Times bemoans the effect of inequality on infant mortality and the effects of polarization on law and legitimacy the bulls are tamping down concerns with issues domestic and geopolitical and pushing pedal to the metal on valuations. Existential threats seemingly emerge everywhere in the newsflow but after the bulls felt their existence threatened by a 3-month long correction the noncommittal words of Jay Powell have invigorated them to demand higher prices and a focus on economic growth. Consequently the S&P 500 likely rises over the near term, but I expect this rally to fizzle out and the index to plumb new lows at 4050 as the awful issues of the day reasssert themselves in investors’ minds. Only then will the bulls take control for a classic Santa Claus rally.

The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:

  • 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.

  • MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.

  • Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.

  • BTP-Bund Spread Of Italian & German Bonds: Italian default risk and a corresponding crisis for the Euro are muted, which is critical for European stability and is good for global growth.

  • Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.

  • Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.

But based on the action yesterday and overnight there are some risks the bulls will fail to climb over, including:

  • EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.

  • Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.

  • Geopolitical Issues: Developments around the 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.

Warmth Is Wealth