Will AI Help Healthcare, Foreign Policy And Peace In The Middle East — Sure, This Is Santa’s Season After All: The Action For December 6, 2023
Atop perennial issues like unaffordable health care and contentious foreign aide the Times this morning adds the incipient disaster of AI and its effects on the demand for labor to the list of woes affecting ordinary people the world over. The unseemly rally on Wall Street reflects the economic divide between those whose wealth benefits from the 2023 bull market and those lacking any foresight to save and participate in the growth of capital. This unseemliness will likely transform into earnest bullishness when the employment report comes out on Friday, as I expect it to show a robust economy that’s beginning to slow down, thus offering the bulls their needed dose of goldilocks thinking. The S&P 500 likely rises this morning but falls back into its trading range as investors wait patiently for Friday’s big reveal.
The bulls have control for the moment as several indicators reveal optimism on corporate earnings and the macro environment. These include:
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
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.
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.
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.
Economic Data: The latest economic data regarding productivityy 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.
But based on the action yesterday and overnight there are an equal number of bearish factors that likely flip the markets around, including:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.
MOVE Index Of Bond Volatility: Fixed income volatility is rising and implies higher inflation expectations and higher interest rates to come, potentially bearish for equities and the global economy.
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.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
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.
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.
Geopolitical Issues: Developments around the Middle East 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.