Finding Silver Linings In Ominous Weather Is Supposed To Be For Markets, Not The Left: The Action For December 22, 2023

A bizarre choice by the Times to give front-page coverage to the almost-as-bizarre case of migrants becoming vibrant influencers illustrates the inanity and insanity gripping all aspects of America. By comparison the markets’ ebullient reaction to disinflation data seems like dry logic, but that won’t help the bulls when inevitable worries about growth, the persistence of wage gains, the existence of a Fed put or the size of federal indebtedness resurface. Market insanity has a shelf life and so the S&P 500 likely rises over the near term toward a new record high but comes down mightily in January.

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

  • 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.

  • 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.

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

  • 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.

  • Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting stronger against the dollar, and that’s good for global growth since many key imports are priced in $.

  • Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.

  • Economic Data: The latest economic data regarding inflation is better than expected, a positive sign for equities

  • 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 few risks the bulls need to climb over, including:

  • S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.

  • 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