The Right Falls Into Line And Makes Fanaticism Normal Enough For The Bulls To Stop Worrying: The Action For January 25, 2024
The Times continues to detail the rightward shift across the world that is sending markets to the sky and morality to the bonfire. This time the desultory example is India, a nation of multiple religions and uncountable dialects and languages where crimes against Muslims go viral along with bewildering religious fanaticism. That India is growing without manufacturing much of anything important eludes investors who trumpet the nation’s rise toward middle income status, ebulliently claiming that India won’t stagnate in the middle income trap the way a dozen other nations have since the post-war period. The narrative is consistent with the goldilocks thesis in the US, currently animating trading as the S&P 500 rises toward a new all-time high on the back of a strong GDP report.
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.
Shanghai Composite Technicals: Chinese equities are trading well and that bodes well for the global economy.
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.
Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish for equities.
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.
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.
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.
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.
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.
Geopolitical Issues: Developments around the Middle East and Ukraine 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.