The World Is Changing In Strange Ways But Global Wall Street Is Riding The Trend: The Action For December 13, 2023
Bewildering changes in the global landscape fill the top half of this morning’s Times and point to the complete segregation of financial markets from cultural and political trends, mirroring the increasing isolation of the resilient US economy from the declining expectations facing most other nations. That segregation shows up not only in new 52-week highs in the S&P 500 but also a stronger dollar against most EM currencies. On the same logic the major currencies are gaining against the dollar as wealthy foreign investors jump into US equities, and that points the way to an S&P 500 rally over the near term. Odds are 50-50 the current rally bubbles up several more percentage points to test the January 2022 highs, marking a double top that will send the bulls scurrying and the bears roaring as what goes up comes back down.
The bulls have control for the moment as a host of indicators reveal confidence in 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 higher.
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.
Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.
Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.
Developed Market FOREX / $US: The dollar is getting weaker against most major currencies (€, ¥ and Renmimbi) and that’s good for global growth.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
Economic Data: The latest economic data regarding wholesale prices and same-store sales suggest nominal GDP is coming down, a positive sign for interest rates and thus equities too
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
Based on the action yesterday and overnight there are, however, many risks the bulls need to climb over and which will eventually bite hard, including:
Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
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 $.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and falling prices signal weak global demand, which is usually bad for equities.
Geopolitical Issues: Developments around the Middle East and Ukraine are a clear negative 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 partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.