GOP Elites Fight For Speaking Rights While The Objects Of Their Scorn Get A Rare Chance To Speak Their Minds On The Front Page: The Action For October 5, 2023
With the low and valiant competing for space with the high and mighty on today’s frontpage of the Times so too the bulls and bears are fighting for ideological dominance as we inch closer to earnings season. The bears see political dysfunction as corollary to weakening fundamentals but fail to tell an eloquent tale of how the cultural and political battlefield translates into productivity and overleverage. I see the relationship clearly explained by the public’s general ignorance of the economy and financial linkages and how that feeds unrealistic demands for public services, transparent immigration policy and political leadership. The issue is simply timing: when will worsening productivity and escalating debt vitiate corporate efficiency and turn valuations down? Most likely in the actual election year of 2024 rather than the fourth quarter we’re currently living through. The S&P 500 likely falls over the near term, but I expect a relief rally as the bulls regain control on optimism about earnings through the latter part of 2023.
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.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, 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.
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.
Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.
Based on the action yesterday and overnight there are several factors that work to 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.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
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.