The Rightward Shift Across Geopolitics Won’t Yet Bring The Bulls Back To Earth: The Action For January 24, 2024
A pair of gruesome stories proceed rightward on the top half of the Times this morning to the main issue of the day, namely Trump’s seeming lock on the GOP nomination. This gallimaufry of world news can only daze and stultify readers other than the Trump base, and presents a pristine analogy with financial market realists and bears who look at the melt-up in equities as the most unseemly rally in a generation. No logic or reason explains why valuations continue to rise in the face of mediocre earnings, persistent inflation and the boiling cultural war that is the 2024 election. Yet the S&P 500 likely rises over the near term, possibly exceeding 4910 as automated traders seek to capitalize on bearish capitulation.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
Volatility Risk Premium: The VRP signals moderate upside as the VIX is muted relative to likely moves in actual volatility.
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.
Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish for equities.
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.
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.
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.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.
Tin Prices: Tin is broadly used across goods and industry and rising prices typically signal better growth prospects.
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.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
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.
Geopolitical Issues: Developments around the Middle East and Eurasia 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.