America Takes A Conservative Turn But That Will Only Turn Off Spending And Productivity, Leaving The Bulls High And Dry: The Geopolitical — Stock Market Connection

Efficiency gains and productivity increases are bullish dreams that have yet to materialize in reported earnings, but until 2nd quarter reports come due later this month the bulls can dream all the way to the bank. Lost in the market’s euphoric rally is the cultural angst rippling through America with every Supreme Court decision, and its visceral impact on productivity and eventually on spending. These factors will soon show up in corporate guidance and turn euphoria into regret, but for now the bulls can rest easy in purblind hope. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. The action in major currencies indicates the $US is weak. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days toward 4480 and then falter as 2nd quarter earnings come in.

The Supreme Court’s rejection of numerous leftist policies and cultural standards exacerbates the culture wars and can only reduce productivity going forward. Curbing the President’s power to forgive student loans and ending affirmative action for college admissions was met by profound division among the public, per an ABC News/IPSOs poll. Half of respondents agreed with SCOTUS on ending affirmative action while only 32% disapproved, and 45% approved of nixing loan forgiveness while 40% disagreed. On the free speech ruling for firms, 43% approved but 42% disapproved. And clearly on abortion the overwhelming majority favor some form of legalized abortion, which the Court imperiled. The Left can feel emboldened about the last two while the Right can feel vindicated on the first two. The result is simply deeper divisions which the Democrats can’t reverse via legislation until 2024. The impact on equities can easily be ignored in this quiet season but will soon manifest to the detriment of earnings in two ways.

First, the cultural divide allows for fringe views to hold sway, and this impacts the workplace since Americans are neither conformists nor automatons. Rising social divisions vitiate the work ethic and decimating confidence, revisiting the 1970s era of social dysfunction. Productivity data clearly confirm this factor as do anecdotal reports from executives.

Secondly the resumption of student debt repayments will shave about 0.2% off of consumption, leading to a marginal but direct impact on GDP. The more profound impact is its potential to be a tipping point in the balance between declining savings and increasing consumer debt. Since much of consumption is born of temporary factors like revenge spending and travel, it’s likely consumption slows markedly as all Americans get satiated with spending while the low-income grow weary of potentially rising unemployment and the affluent fear peak asset prices. While the last employment report clearly shows hiring across both services and manufacturing, there is little reason for people to feel we’re in a new upcycle when productivity is declining and AI threatens to lay off workers of every stripe. The economy is set up to falter and that’s coincidentally just what the Fed wants, but what the bulls blindly ignore.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.