The Bulls Are More Resolute Than Resilient But As Long As The Other R-word Gets Pushed Aside The Bulls Will Rule — The Latest On The Global Economy

Resilience is the word of the decade and equity bulls have been making good use of this term to justify their euphoria in the face of Fed tightening and predictions of a US recession. Unfortunately for the bulls the global economy looks increasingly less resilient with each data release, leaving the US as one major source of hope. No one ever did well betting against America and consequently the bulls are still in control, as 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 in the short term but bearish intermediate term. There are several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to test support around 4300 before rising modestly over the next few week.

Key to US economic resilience is the housing market, which has been defying the Fed for over a year now. The National Association of Realtor’s affordability index is trending back toward last October’s lows, which is magnitudes below 2021 levels. Housing now depends on employment as only a downturn in hiring can move homeowners to sell existing homes and thus raise supply, while simultaneously cooling demand for both existing and new homes. The Fed knows this economic algebra and believes that housing affordability for the moderate to low-income population is part of their moral agenda.

The ECB knows it too and doesn’t face the same full employment mandate the Fed does, so it can focus on simply dampening European growth. German expectations continue to deteriorate and now even Italy is seeing some deterioration, while Spain and France muddle along. The European economy is clearly battling the ECB and based on the light foundations for European growth it’s likely the ECB wins. China isn’t stimulating enough to boost their economy as seen in the woes of real estate companies, two more of which defaulted in the past week. Europe depends on China as a buyer and with that economy increasingly looking moribund the concern is the US also trails off. The Atlanta GDP tracker is slowly deteriorating to mid 1% growth, reflecting the time-honored fact that when the consumer and investor fight the Fed the Fed winds up winning. Today’s merchandise trade figures show the same trend, as consumers cut down on imports. The global economy is diverging from equities and the winner of this battle will be made obvious soon.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.