The Hard Right Gets Its Man While Hard Reality Of Gun Murder Usurps The News: The Action For October 26, 2023

Readers of the paper version of today’s Times were spared the gruesome news of another mass killing and instead focused on the bizarre election of a hard-right climate denier to the #3 position in the land. The nasty realities of life in America today cloud the otherwise strong economic news that would ordinarily pump Global Wall Street to swallow high interest rates and buy equities. But the reality of bitter medicine for an overheating America is higher interest rates for longer, and that will likely push the S&P 500 down over the coming days, only to resurrect once November begins and earnings season falls away.

The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:

  • 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.

  • EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.

  • 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.

  • 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: Rising gold prices reflect higher potential inflation but less restrictive interest rates, and concerns about geopolitical risks, which is on net bad for equities.

  • Economic Data: The latest economic data regarding housing and GDP is stronger than expected, a negative sign for interest rates and equities

  • 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 will soon 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.

Warmth Is Wealth