Thursday, March 3, 2022

Morning Note: Less Than Ideal (Equity Market) Conditions

Looking at present trends/setups, and what they portend with regard to US equities, for --

The dollar: Neutral
Interest rates: Negative
Fed Policy: Negative
Fiscal Policy: Neutral
SP500 Valuation: Negative
Sector Leadership: Neutral
Macro Conditions: Positive
Geopolitics: Negative
SP500 Technicals: Negative
SP500/Nasdaq Comp Breadth: Positive
Equity Market Sentiment: Positive (rising fear)
Credit Market Conditions: Neutral

-- our proprietary equity market conditions index scores -16.67 this month. Which is a 12.5-point improvement over last month's reading.

Our very simple "5-Point Model", however, declined from -20 to -40.

The difference between the two is that the latter has far fewer inputs and we do no technical analysis (as we do for our broader index) on its inputs. It's simply an on-the-ground snapshot of its components

So what's that all say? Well, it says that the US equity market has its challenges going forward. Or, let's say, conditions are presently less than ideal... That's all...

As for present geopolitics and their impact on equities, here's the view from our geopolitical research partner BCA:
"According to BCA Research’s Global Investment Strategy service, hopes of an imminent peace deal between Russia and Ukraine will be dashed. The conflict will worsen over the coming days.

As was the case during the original Cold War, both sides will eventually forge an understanding that allows the pursuit of mutually beneficial arrangements.

A stabilization in geopolitical relations, coupled with fading pandemic headwinds, should keep global growth above trend this year, helping to support corporate earnings.

The era of hyperglobalization is over. While central banks will temper their plans to raise rates in the near term, increased spending on defense and energy independence will lead to higher interest rates down the road.

For now, the team is maintaining an overweight to stocks on a 12-month horizon. While it will take a month or two, both sides will ultimately forge an understanding whereby Russia and the West continue to publicly bad-mouth each other while still pursuing mutually beneficial arrangements. Remember that during the Cold War, the Soviet Union continued to sell oil to the West. Even the Cuban Missile Crisis had only a fleeting impact on equities.

The near-term outlook for risk assets has deteriorated. They are downgrading global equities from overweight to neutral on a tactical 3-month horizon. They continue to expect stocks to outperform bonds on a 12-month horizon as the global economic recovery gains momentum. On an even longer 2-to-5-year horizon, equities are likely to struggle as interest rates rise more than expected." 
With regard to commodities, we remain long-term bullish, as does another premium research provider of ours, Variant Perception:
"• Our commodity supercycle thesis (laid out in Oct 2020) is playing out, as commodity producer capex vs assets is at multi-decade lows.

• Cyclical headwinds remain with China’s slowdown and our cyclical model is forecasting negative 6-month returns. We wait for headwinds to recede before going max bullish again.

• Fossil fuels should remain resilient even with cyclical headwinds as supply constraints remain extreme. Commodity history shows that the death of fossil fuels will not be a straight line and there is plenty of scope for upside surprises, see our thematic: Lessons from Commodity History.

• Capex data is ticking up, but needs to rise a lot more for us to turn bearish on the commodities complex."

Video watchers know that the near-term headwinds they cite more or less jibe with our near-term view that we will absolutely experience some corrective action off of current levels. With regard to China, however, we see their latest efforts, on top of monetary easing, with regard to infrastructure plans and tax cuts in particular, perhaps shortening VP's six-month negative outlook -- at least in terms of China's influence in the commodity space. We also see China as becoming a net positive for our emerging markets and Eurozone exposure as 2022 progresses...

Asian equities were constructive overnight, with all but 5 of the 16 markets we track closing higher.

Europe, however, continues to struggle, with 15 of the 19 bourses we follow in the red as I type this morning.

US stocks are mixed to start the session: Dow up 120 points (0.35%), SP500 up 0.21%, SP500 Equal Weight up 0.14%, Nasdaq 100 down 0.21%, Nasdaq Comp down 0.37%, Russell 2000 down 0.72%.

The VIX sits at 30.55, down 0.61%.

Oil futures are up 1.11%, gold's up 0.23%, silver's down 0.45%, copper futures are up 2.03% and the ag complex (DBA) is up 0.93%.

The 10-year treasury is down (yield up) and the dollar is up 0.22%.

Among our 38 core positions (excluding cash and short-term bond ETF), 18 -- base metals futures, Latin American equities, utilities stocks, staples stocks and South Korean equities -- are in the green so far this morning. The losers are being led lower by Nokia, MP (rare earth miner), AMD, solar stocks and uranium miners.

"To succeed we can no longer understand only the domestic local economies. We have to understand the changing global macroeconomic picture. And perhaps more important, we have to understand the institutions and entities that operate within this system so we can properly understand how to navigate their increasingly involved policy decisions."
--Roche, Cullen. Pragmatic Capitalism

Have a great day!

PS: Clients:   Nick, Ryan and yours truly will be away from the office from tomorrow afternoon to late next week (annual family ski trip). Please don't hesitate to reach out to Dan, Kylie or Gladys should you need attention while we're gone...

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