DeSantis Must Succeed Against The Ravages Of Idalia To Keep America Safe From Trump: The Action For Wednesday, August 30, 2023

Markets are moving forward without a conscious care for the destruction to come to Florida from Hurricane Idalia, but the political consequences of DeSantis’s reaction to the impending tragedy will affect national confidence significantly. Should DeSantis handle the devastation well it will not only hurt Trump but also validate America’s belief in the utility of public services, which implicitly boosts the intervention-addicted Democrats. The markets do best when countervailing powers put government into gridlock so anything that keeps Trump from sweeping the GOP into full control will satisfy investors. Consequently markets are basking in the hopes for a nonevent in Florida along with a goldilocks economy and placid geopolitical arena. This mood likely persists through the week as the S&P 500 is positioned to rise over the near term back to the 4600 level.

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

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

  • Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.

  • Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.

  • 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.

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

  • 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.

Based on the action yesterday and overnight there is only one risk the bulls need to climb over in the near term, namely:

  • Liquidity Metrics: Measures of money flow across the globe are trending downwards lately, which hurts equities.

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.

Warmth Is Wealth