Double Standards Hit Home In Midtown But Not On Wall Street: The Action For December 27, 2023
The Times reveals this morning the breadth of problems afflicting New York in dealing with illegal immigration while subtly drawing parallels with the situation on the Southern border, a fact bound to raise nasty schadenfruede among southern conservatives. While New Yorkers suddenly sound more like rapid Texans in denouncing Biden’s inaction on the border the double standard on the southern tip of Manhattan has yet to be castigated. Belief that a slowing economy brings disinflation and lower interest rates is coupled with belief in a strong economy that brings revenue growth and productivity expansion, both of which help put equity valuations in the stratosphere. The S&P 500 likely rises over the near term to a new record high as investors get used to the new normal of high valuations, but 2024 will likely bring the bulls down to earth as the election dynamics bring the awful national backdrop into closer focus.
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.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, 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.
But based on the action yesterday and overnight there are increasing risks the bulls need to climb over, including:
EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.
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.