The Bulls Dip In But Water Scarcity Is A Bearish Issue For The Long Run: The Action For April 24, 2024
Water issues fill the top half of the Times front page this morning, offering Democrats the marginal hope they can turn ecological damage in Arizona into sustainable party switching. The same issue haunts the Levant and makes peace in the Middle East an absurd hope, since the two-state solution in the context of water scarcity requires a solid approach to nation-building and no such idea has been agreed 375 years after the Treaty of Westphalia. Where ecological damage and nation-building coalesce with true clarity is in the debt markets, as interest rates on government debt to fund ecological development or social services exact a painful price in these days of persistent inflation. Such is the dilemma Biden and the Democrats face, with no clues how to persuade the people they know what’s best and what will work. The threat of higher rates for longer and a divisive and violent election mean the S&P 500 has lower lows in its future, even as the bulls buy the dip today.
The bulls have control for the moment 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.
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
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.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and a corresponding crisis for the Euro are muted, which is critical for European stability and is good for global growth.
But after the major earnings reports are behind us, if not sooner, the bears will likely retake control as both high interest rates and several other issues come to the fore, 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.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
My current positions include 3M (MMM), Pfizer (PFE), a modest position in UPRO and a larger and moderate position in SPXU, which nets out to a modest short position in equities.