The Bulls Start To Awaken To The Year Of Disinformation: The Action For February 2, 2024
The remarkable turnabout in government thinking on the economy has thrown markets for a loop this morning as a potentially strong opening has muted to marginal gains. What the Fed implied earlier late last year has turned out false, with the economy surging on the backs of manufacturers. Bond yields are correspondingly higher as traders now accept the Fed’s latest admission that rate cuts are premature. And the Times this morning points out an even worse example of poor forecasting, in the form of weather warnings by amateur meteorologists moving the public discourse out of science and into the imagination. Odds are the bulls don’t fully accept that this election year will be the year of trusting little or nothing, and despite today’s shocker the S&P 500 likely rises over the near term as we test new highs around 4950, if not higher.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
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.
Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.
Developed Market FOREX / $US: The dollar is getting weaker against most major currencies (€, ¥ and Renmimbi) and that’s good for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting stronger against the dollar, and that’s good for global growth since many key imports are priced in $.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
Tin Prices: Tin is broadly used across goods and industry and rising prices typically signal better growth prospects.
Based on the action yesterday and overnight there are some risks the bulls need to climb over, including:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.
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.
MOVE Index Of Bond Volatility: Fixed income volatility is rising and implies higher inflation expectations and higher interest rates to come, potentially bearish for equities and the global economy.
Geopolitical Issues: Developments around West 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.