Constricting Valuations And An Expanding War Go Hand In Hand, Regardless Of What The Fed Says: The Action For April 17, 2024
The Times gets to the event most impacting the world on its right-side Page 1 column this morning, namely whether Israel’s response to Iran’s direct attack will aim for the latter’s nuclear sites. The likely dynamic is precisely what the bulls can least afford, namely that Israel tests Iran’s homegrown and Russian-made air defense systems first, and if finding them as faulty as Russian equipment has so far demonstrated, then go for the jugular and try eliminating the nuclear program. Given Israel’s shock and awe response to Gaza and the incentive Netanyahu has to make himself a hero after living as a goat, this flamboyant scenario can’t be discounted. And the uncertainty of it is clearly plaguing the markets today, along with the old story of higher rates for longer from the politically-wary Federal Reserve.
The bears have control for the moment 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.
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.
High Yield Credit Spreads: The cost of borrowing is rising for lower-rated firms compared to their AAA siblings, a portent of potential defaults to come.
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 just a few factors that support the bullish case, and these will likely re-enter the market’s dialogue as the meat of earnings season arrives next week:
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.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
Yesterday afternoon I sold my remaining position in the levered ETF UPRO and at the close added substantially to my position in the inverse-levered ETF SPXU. Consequently my current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to a moderate short position in equities.