Even With Loads Of Bad News Biden Can Stay The Course, If The Market Corrects Sooner Rather Than Later: The Action For February 23, 2024
Sad, triumphant and bizarre stories dot the Times this morning but wittingly or unwittingly the paper also serves up red meat for the party of Trump, as both China and Mexico come in for damning evidence of filthy morals and politics. The saving graces for Biden are Trump’s immutable unpopularity and the strong US economy, which together will likely put him over the top in November. But a key variable will be the state of the equity market, which could easily turn negative and destroy all confidence in Bidenomics. The market this week has pulled forward not just one year but two years of earnings to trade at extraordinary valuations, presaging a major correction ahead. For Biden the timing of that correction is all-important, and I see it happening sooner rather than later.
The bulls have control for the moment as several indicators reveal enormous 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.
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.
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.
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:
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.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
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.
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 Eurasia are a clear negative for equities.
My current positions include 3M (MMM), Pfizer (PFE), a large position in UPRO and a smaller position in SPXU, which nets out to a long position in equities.