Strange Bedfellows In Washington Make For A Schizophrenic Day On Wall Street: The Action For April 11, 2024
The Times covers the bizarre fate of a GOP bill in the House that suffered an alliance of Right wing Trumpist Republicans with partisan Democrats on its way to a shocking defeat. Whether the anti-terrorism bill needs revision may be salient to national security but even more salient is the growing trend of extremism infiltrating both parties and often uniting them against longstanding American values and interests. The bulls and the political optimists look beyond 2024 and hope politics rights itself, but the political trends are now entrenched and foretell increasing dysfunction breeding ever higher deficits. Just as inflation is the symptom of increased spending outpacing output, so too higher rates for longer will ensue from our political mess. As such the S&P 500 has little upside ahead unless the earnings season that begins tomorrow contains shockingly positive news.
The bulls have taken control this afternoon after bears threatened more selling this morning. But it’s likely the bears force more selling by the close as several indicators reveal pessimism on 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 lower.
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.
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.
Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.
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.
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 to the upside, if only for a another few percentage points, including:
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good for equities.
Tin Prices: Tin is broadly used across goods and industry and rising prices typically signal better growth prospects.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
This morning I sold a small portion of my holdings in the levered ETF UPRO, consequently my current positions include 3M (MMM), Pfizer (PFE), a small but still moderate position in UPRO and a smaller position in SPXU, which nets out to a modestly bullish position in equities.