Moscow’s Long Game Suits The Bulls And The GOP Fine: The Action For Thursday, September 14, 2023
Putin’s skill in defying sanctions made the top left of the Times this morning and raises the odds he can win the long game with a little help from his GOP friends. As Ukraine makes modest gains and depends heavily on American aid the prospect of a GOP win in 2024 bodes well for Putin and by perverse logic for the bulls as well. High valuations and optimistic expectations for earnings growth feel more realistic if interest rates are expected to decline in the coming years, and that’s what the GOP are effectively promising. Cuts to Ukrainian aid would likely marry with cuts to social spending and bring the budget deficit down, taking down interest rates as well if one naively assumes the GOP would restrain itself from adding even bigger tax cuts. Such logic suits the bulls and forces the bears to take their lumps and hope investors and voters come to their senses in time to save Ukraine and a return of Trump. Respite will come soon as the S&P 500 likely rises over the near term to the top of its trading range, reversing course and retracing recent gains back to 4450 by next week.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.
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.
Based on the action yesterday and overnight there are equal number of risk factors confronting the bulls, including:
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
Economic Data: The latest economic data regarding inflation, retail sales and the tight labor market is much stronger than expected, a negative sign for bonds and consequently for equities too.
Gold Prices: Falling gold prices reflect higher interest rates and concerns about the strong US dollar, 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.