Strange Bedfellows Make For Bad Politics And Bad Market Fundamentals: The Action For February 8, 2024
The bizarre alliances underlying the Ecuadorian government, and anti-Jewish protests of black social justice paladins along with Pro-Palestinian sects make the front page of the Times this morning, along with the strangest and least effective alliance in the world today, the EU. The suffering and uncertain future of Ukraine sadly hinges on the poorly performing EU now that Trumpism has influenced Biden and enslaved nearly all of the GOP. But the Times unwittingly implies that the Americas are in for worsening dysfunction too as the alliances grow ever more incomprehensible and lead only to the inexorable rise of statism. For the bulls that should be of paramount concern and today at least they’ve ceded some ground to realism, as the markets consolidate. But the S&P 500 likely rises over the near term, driven by momentum and the absence of earth-shattering newsflow.
The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
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.
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, potentially bearish for equities.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Zinc Prices: Few commodities are as broadly important as zinc, and falling prices for zinc signal that global demand is weak, which is usually bad for equities.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
Based on the action yesterday and overnight there are technical factors that could flip the markets around, including:
Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, potentially bullish for equities.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps 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.