Democrats Liken Big Pharma To Racketeers But Secretly Hope Investors Know Better: The Action For Tuesday, August 29, 2023
As the political season intensifies so too does the attack on America’s pharmaceutical industry, which the Democrats know will achieve little since drugs are not made exclusively for government contracts but instead for the American healthcare consumer. Consequently the attacks have little effect on pharma equity prices, which depend more on progress of revolutionary weight-loss drugs and the broader pipeline than political theatre. For now this theatre is adding on to the profit-taking urge among vacationing investors and pulling the markets modestly lower. The S&P 500 likely falls over the near term and bottoms out around 4300, after which I expect it to reverse course and rally significantly, with pharma participating regardless of the headlines. This would suit most Democrats too as we approach the 2024 election.
The bears have control for the moment as several indicators reveal pessimism on the macro environment. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
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.
Liquidity Metrics: Measures of money flow across the globe are trending downwards lately, which hurts equities.
But based on the action yesterday and overnight there are several factors that will eventually flip the markets around, including:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
EPS Estimates: In the last week Wall Street analysts raised profit forecasts for many firms in the S&P 500.
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.
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.
The preponderance of bullish factors are a key reason I expect markets to bottom out soon. My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.