The Swamp Darkens While The US Economy Gets Murkier Too: The Action For Thursday, September 28, 2023
In a rare expose of the Left the Times this morning all but convicts the senior Democratic Senator from Jersey while noting the distinctly anti-leftist pleas of Democratic officials in response to growing homelessness. The stinging cross-currents that make American politics mephitic are a pristine analogue to the murkiness of the US economy, where spending by increasingly indebted consumers makes the economy look stronger than it is. The only truth that’s undeniable is that interest rates are rising as confidence attenuates, and that means the S&P 500 likely falls over the near term, though a bottom is near as implied volatility rises to levels typically associated with capitulation.
The bears have control for the moment as several indicators reveal pessimism on the global macro environment. These include:
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.
Economic Data: The latest economic data regarding durable goods and the labor market is better than expected, a negative sign for interest rates and thus for equities too.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and corresponding crisis for the Euro are heightened, which can destabilize Europe and is bad for global growth.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global 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 $.
Gold Prices: Falling gold prices reflect higher potential interest rates & a stronger $ more so than geopolitical security, which is on net bad for equities.
But based on the action yesterday and overnight there are several contradictory cross-currents that will flip the markets around soon, including:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX is heading toward peak levels but actual volatility remains muted.
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.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good 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.