Biden’s Intense Efforts To Aid Israel Contrast With Powell’s Timid Posture On The US Economy: The Action For October 20, 2023
Earnestness triumphs over hypocrisy at the White House this week as the Times details Biden’s efforts to help both sides of the Israel tragedy while less edifying policies on immigration, inflation and energy take a back seat. But the economic consequences of Biden’s hypocritical stances on the latter issues belies the Federal Reserve’s timorous analysis of the economy and its future policy actions. The compounding of uncertainty on all fronts likely pushes the S&P 500 down over the near term, leaving a standard-issue fourth quarter rally to begin at least a month late.
The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.
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.
High Yield Credit Spreads: The cost of borrowing is rising for lower-rated firms compared to their AAA siblings, a portent of potential defaults to come.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Gold Prices: Rising gold prices reflect higher potential inflation but less restrictive interest rates, and concerns about geopolitical risks, which is on net bad for equities.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
Based on the action yesterday and overnight there are several factors that eventually flip the markets around, including:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps 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.