The Bulls Balance Pity For The Violence Playing Out In Real And Sham Democracies With Financial Hopes For This Election Year: The Action For March 20, 2024
The impending disaster playing out in Gaza elicits the Time’s emphasis this morning as the Democrats try minimizing election risk while pretending to influence events on the ground. Lost in the coverage is the question of how democratic would a Palestinian State be? Since there is no agreement on how to write Constitutions one can infer that the recent democratic experience in Gaza bodes ill for any move toward statehood. What is needed is a framework for writing constitutions that emphasizes the historical emotional tenor of the diverse society within the proposed nation. That can only come from the literature of the society, and the views of its authors toward economic structure. This evidence of poorly run nation states is too overwhelming to believe that forming a nation based on technocratic analysis and election politics does any good. For now such concerns have no priority among global investors, who are fixed on the technical issue of macroeconomic policy, and whether the Fed will ensure abundant liquidity in this election year. Until Jerome Powell makes that clear this afternoon the S&P 500 likely consolidates, and barring a bearish surprise the index resumes its rally by tomorrow.
The bears are equally matched against the bulls this morning as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
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.
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.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global 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 $.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
Based on the action yesterday and overnight there are several factors that will soon flip the markets around, including:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
Shanghai Composite Technicals: Chinese equities are trading well and that bodes well for the global economy.
Inflation Expectations: Investors expect lower inflation over the coming years, implying lower interest rates to come, 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.
My current positions include 3M (MMM), Pfizer (PFE), a large position in UPRO and a smaller position in SPXU, which nets out to a bullish position in equities.