The Middle East Becomes A Slow Burn As Global Wall Street Tries To Stave Off The Inevitable: The Action For October 31, 2023
The Times limns the current state of the Middle East as a slow burn where no force acts to stop the violence and no one can predict the consequences in the years ahead. The economic corollary has been made by bears like myself as overstimulus and a drying up of the work ethic that point to declining productivity ahead, but this has failed to turn investors minds until recently. Now the world sees the marriage of horrible geopolitics with insipid domestic politics and the resulting Autumnal correction that will play out this week. While the bulls try to extend yesterday’s rally this likely fails by the close, as the S&P 500 falls further over the near term and bottoms out at 4050 before beginning a Santa Claus rally in November.
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.
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.
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.
Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.
But based on the action yesterday and overnight there are several factors that 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.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and a corresponding crisis for the Euro are muted, which is critical for European stability and is good for global growth.
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.