Trump Or Trump-Lite, Either The Way The Bulls Believe They Win: The Action For January 23, 2024
The Times is bothered this morning by the prospects of Republican unity for Trump and Democratic disunity for Biden, but this is only half the problem facing both America and the rest of the world. Even if 7% of Republicans refuse to vote for Trump as the polls reveal and many GOP elites believe, the resulting re-election for Biden will only continue his Trump-lite policies. Protectionism is natural for Biden and hedging his foreign policy so that allies are unsure of his reliability has been on full display. Either way the world is worse off but the markets are betting on one benefit from a Trump win, namely tax cuts. So for suddenly protectionist bulls the election promises either more of the same or more of what they like. Consequently the S&P 500 likely rises today on hopes Trump wins convincingly in New Hampshire, with little foresight into the coming challenges to both the economy and inflation.
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 moderate upside as the VIX is muted relative to likely moves in actual volatility.
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.
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.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
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 $.
Geopolitical Issues: Developments around the Middle East and Central Asia are a clear negative for equities.
I am effectively neutral on the market, as my current positions include 3M (MMM), Pfizer (PFE), and a small position in UPRO and a larger position in SPXU, which nets out to a neutral position in equities.