Conservatives Watch Their Jurisprudential Moment Dissolve With Justice Thomas’ Ethics Problems, Presaging A Similar End To Goldilocks Thinking On Wall Street: The Action For Friday, September 1, 2023

Persistent anger over Thomas’ likely favoritism to those who supply him suggests the conservative Court may temporarily tilt to the center for political expediency. Backing off their off-center views will find a comical parallel with the uber-bulls on Wall Street who see new highs in sight because the data seems so perfect on first glance. But today’s payrolls report shows persistent wage growth along with persistent hiring, which will keep inflation persistent and high interest rates in turn. Bullish enthusiasm is slated to dissolve as the S&P 500 peaks upon reaching 4565 since the economy isn’t actually in a goldilocks moment and there are plenty of reasons for profit-taking before making a run to new yearly highs.

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.

  • 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.

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

  • 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.

But based on the action yesterday and overnight there are several risks the bulls must address and which likely bring the S&P back down next week, including:

  • Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.

  • WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.

  • Economic Data: The latest economic data regarding employers’ future hiring decisions is much stronger than expected, a negative sign for equities since it means above-trend growth and consequently high interest rates down the road

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

My current positions reflect my near-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