As Establishment New York Deals With The Disenfranchised So Too The Markets Vainly Try Connecting The Political-Economic Dots: The Action For Friday, September 22, 2023
Today the Times showcases how the once proud Roosevelt Hotel has become a way station for migrants fleeing unimaginable suffering, a plaintive reminder of the disconnects that describe the current American situation. As the people voice little or no confidence in leaders of both parties so too the Fed contradicts the markets by stubbornly insisting market forecasts are wrong until proven right. The rise in interest rates due to the Fed’s rigid posture has still more room to go, and that will likely push the S&P 500 down further to the 4300 level. I expect it to find support there or a little lower at 4268 before the bulls come roaring back into October.
The bears have control for the moment as several indicators reveal tightening liquidity and pessimism re the macro environment. These include:
Liquidity Metrics: The latest Fed action on the QT front to reduce the balance sheet along with other measures of money flow across the globe are trending downwards lately, which hurts equities.
Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.
Long-Term Treasury Rates: Long rates are rising and that will reduce the attraction of equities while cooling the housing and auto industries to the detriment of economic growth.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
But the overnight action in China was bullish as it signals the CCP is willing to gradually stimulate the markets and economy to prevent a meltdown in confidence; that and other factors listed below point to a recovering market as September comes to close:
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good for equities.
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.
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
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.