A Financial Theatre Of The Absurd Reveals The Shape Of Things To Come In 2024: The Action For December 20, 2023

Absurdity lies in wait for 2024 as Colorado launches the first major salvo in the Presidential election context. While Trump may win back his place on the ballot the legal argument used against him clearly resonates with a large minority or possibly majority of voters who detest the former President, according to this morning’s Times. The markets often lead the economy but in this case they are leading the entire nation as investors watch the present-day absurdity of high valuations in the face of high real interest rates and geopolitical disasters. The S&P 500 likely rises over the near term and tests the old high around 4800, likely climbing further before coming down just as hard if inflation data continue to show gradualism instead of rapid decline.

The bulls have control for the moment as several indicators have moved higher and reveal confidence in corporate earnings and the macro environment. These include:

  • Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.

  • 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.

  • Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.

  • Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, 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.

  • High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving economy.

  • 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.

  • Developed Market FOREX / $US: The dollar is getting weaker against most major currencies (€, ¥ and Renmimbi) and that’s good for global growth.

  • Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.

And based on the action yesterday and overnight there are just a few global risks the bulls need to climb over, including:

  • Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.

  • WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.

  • 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.

Warmth Is Wealth