Inconvenient Facts Stoke Mass Suffering In Libya And Confusion On Wall Street: The Action For Wednesday, September 13, 2023
Incomprehensible carnage is Libya links back to climate change and poor infrastructure according to the Times this morning, but the consequence of this analysis is confusion about how to get political change that addresses these twin problems. For most investors the answer is to live with the confusion in the form of gridlock and status quo policies. But the bears have a say and will soon take the market back down as arguments for progress with low inflation and high productivity are too fanciful to sustain the bulls at current valuations. Politics has given the world a poor foundation for economic growth and social amelioration and that means pressure on valuations until a stream of good news emerges. The S&P 500 likely rises over the near term, but I expect the market to reverse course and fall over the later this week as bullish exuberance meets worries over persistent inflation and the high interest rates that ensue from such concerns.
The bulls have control for the moment as several indicators reveal confidence in 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.
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.
But the action yesterday and overnight reveal a slightly larger number of negative factors the bulls need to climb over, including:
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk is ticking up and that portends possible crisis for the Euro, which can destabilize Europe and is bad for global growth.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy
Gold Prices: Falling gold prices reflect higher restrictive interest rates, and concerns about the strength of the dollar along with geopolitical risks, which is on net bad 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 largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.