The Politicization Of Religion On Both Main Street And Wall Street Helps Power The Market Higher: The Action For January 11, 2024
Evangelicals giving up on churchgoing in favor of Trump-promoting astounds the Times this morning but the politicization of religion is a fixture in small cities and towns that has recently upended Wall Street as well. Where it was once religion to promote an independent Fed that one never fights, now the bulls not only fight the Fed but believe high federal debt loads must force the Fed to lower rates instead of increase them in this election year. Far from seeing higher inflation as a cause for higher rates, the bulls expect the Fed to bow to pressure to monetize huge deficits and keep the party rolling so the American public doesn’t lose all confidence in their economic future. Consequently the S&P 500 likely rises over the near term, gingerly testing new highs before coming back down to earth.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
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.
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.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
But based on the action yesterday and overnight there are some risks the bulls need to climb over, including:
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.
Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.
Economic Data: The latest economic data regarding inflation and a tight labor market is worse than expected, a negative sign for equities.
Geopolitical Issues: Developments around the South China Sea, Middle East and Ukraine are a clear negative for equities.
My current positions reflect my near-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a moderate position in UPRO that is partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.