Political Tides Reverse But The Fiscal Song Remains The Same For The Bulls: The Action For February 9, 2024
The Times is forced by current events to cover the other side of the political divide, forsaking reporting on the latest bout of GOP idiocy for the torrent of desultory news for Democrats. That the public is getting a disastrous choice for the Presidency in 2024 underlies both lead stories, but for the bulls this amounts to much ado about nothing. If Biden beats back fears over his sentience then fiscal spending will continue to drive growth until productivity slacks off, and if Trump wins then fiscal stimulus will get yet another boost via tax cuts. The only question salient for markets is when does analysis of business profits lead investors to admit this quarter’s poor fundamentals and poor quality of earnings, which have always been a harbinger of bad times to come.
Likely that question gets answered only after Nvidia reports earnings later in the month. For now the bulls have control 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.
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Economic Data: The latest economic data regarding inflation is better than expected, a positive sign for equities
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:
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.
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.
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.