With Crisis Averted The Equity Bulls Return To Form Despite What Everyone Else Knows — What Fixed Income, Currency & Commodity Markets Are Telling Us
Jejune optimism is back in vogue this morning as equities are poised to rally despite clear economic headwinds that animate the Fed hawks. Less ebullient are fixed income, currencies and commodities traders, who are getting in line with the Fed and offering a stark warning to those trying to throw 2023 into the trash heap and look out to 2024. I expect the FOMO trade to pick up and send the S&P back to last summer’s levels before sense and sensibility return. 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 bullish. Yesterday's cross-asset action brought several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. 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 toward resistance around 4300.
The action in FICC accentuates the bizarre new ethos governing equities, namely that megacap tech stocks are defensive rather than highly cyclical. Apple for example, recently reported declining year-over-year sales, while Meta and Google barely grew their sales despite high inflation. Microsoft beat inflation by a smidgen while Amazon tracked well above inflation but at the cost of steeply declining earnings. Most equities are treading water this year, reflecting the modest hedge that earnings pose against inflation and the deep uncertainty about geopolitics and the course of interest rates. But FICC markets offer a clearer picture of where the global economy is headed.
Fixed income volatility is up, suggesting the lows in yields seen earlier in the Spring are in for the next few months. Bond market traders are fighting the Fed less and less, heeding the mantra of higher rates for longer. Currencies reflect a slowing global economy vulnerable to declining liquidity from the Fed, as even fast-growers like India haven’t been able to pick up value against the dollar. And commodity disinflation continues to reflect the growth slowdown. Industrial and precious metals continue to trade negatively, fossil fuels are breaking down as oil cuts major support levels and foods and softs are generally downtrending. Disinflation is everywhere except in consumer prices, which reflect the Fed’s conundrum and point the way to declining asset prices as Spring matures into Summer.
My current positions include a large cash position, 3M (MMM), Pfizer (PFE), a moderate position in the levered ETF UPRO and a slightly smaller position in the inverse levered ETF SPXU, all of which net out to a small long position in equities.