The Supreme Court Falls Deeper Into Disrepute While The Bulls Preach Bottomless Optimism: The Action For May 17, 2024
The Times takes a hatchet to Samuel Alito’s reputation this morning by noting his implicit support for Trump’s election lies and his comical excuse that his wife is behind it. While this only confirms that the courts won’t stop Trump from campaigning, it does point to the direct connection between politics and the risks to the current bull market. Ever since Trump the unedifying lives of our leaders has fed a cycle of disrespect, lies and passing the buck that results in macroeconomic imbalance and high interest rates. The deepening disrespect that politicians endure makes them they feel no choice but to tell blatant lies that at least serve to keep their base happy and leave open the possibility the swing voter will prefer their lies to the others. The truth simply cannot be used, since public services are not meritable according to its beneficiaries, such as the minorities who support social justice reforms or the interest groups who favor regulations, and are falling far behind as both technology and social diversity race ahead. Capitalism feeds both technology and media and makes people feel more disconnected from others while hastening ecological decline. Neither growing the government nor reorienting it toward business nor cutting it to size has any impact on these trends, leaving politicians with no erstwhile policies to offer. So Trump lies about something new each minute and Biden lies about his major policies, like stifling Ukraine while pledging to help it, fueling inflation while labelling his policies inflation reduction, and greening the nation while protecting polluting industries in the name of unions and fair trade. The result is bigger government from both sides, leading to big deficits and high rates.
The bulls don’t feel high rates can dog their investments but it’s clear that the equity and bond markets are positively correlated, and lower rates are necessary for multiples to expand. I see this a short-term trend with a major correction ahead this summer or into the Fall. 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. Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.
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.
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.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
My current positions include 3M (MMM and its spinoff SOLV), Pfizer (PFE), a moderate position in UPRO and a similar position in SPXU, which nets out to a neutral position in equities.