Equity Bulls Ignore The Worries While Everyone Else Tries Stepping Over Them— What Fixed Income, Currency & Commodity Markets Are Telling Us
The melt-up in equities reflects the transition from climbing the wall of worry to no longer believing in any worries at all. The risks of a declining work environment, political environment and credit environment are simply being ignored as the equity bulls believe that low economic growth somehow translates into fat profits. Such absurdity has the benefit of poetic elegance, and consequently emotions run to the bullish rather than bearish side. 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 short-term but bearish long-term. Yesterday's cross-asset action brought one positive factor for US stocks. Copper's chart is signifying global growth. Expect the S&P 500 to rise modestly over the next few days to 4480 before falling hard.
Financial markets agree on the persistence of a low-growth global economy, but diverge on the persistence of high profitability. Equity and bond volatility has declined, implying that no recession is imminent but interest rates will remain restrictive. Bearish bets on equities are being unwound and imply that more bears are caving in to the idea of a soft landing. Currencies are mixed with key Asian currencies weak while the Euro gains, a reflection of interest rate differentials and confidence in limited but persistent global growth.
High interest rates that restrict economic growth is baked in because of the slow but steady pace of disinflation. The commodity complex continues to be a force for this, but less so than earlier in the spring. Fossil fuels are trying to break resistance levels but are more likely to consolidate and retest prior lows than break higher. Precious metals are breaking down while industrials are valiantly trying to make new uptrends, reflecting the see-saw nature of confidence in the Chinese reopening and stimulus plans. Grains are rocketing higher on weather concerns while meats, other ags and softs are largely consolidating.
The problem is explaining how can profits grow by 10%-plus next year in such a restrictive and mildly disinflationary environment. The bulls effectively believe that bullishness will pull profits higher, as businesses and consumers grow ever more confident. This fragile belief is just a major correction away from disintegrating. Expect that to occur as earnings reports come in and portfolios rebalance away from overvalued equities.
My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.