Friday, September 30, 2022

Morning Note: Where's Waldo?

Yesterday's final look at Q2 GDP came in unchanged at -0.6%, with personal consumption besting consensus expectations with a 2.0% annual increase. Initial jobless claims continue to defy the recession narrative, with a sub-200k print for last week. 

But here's the thing folks, save for a few data points -- including this morning's releases, which reflect rising income and consumption among US consumers, and, alas, inflation above consensus expectations (not good for equities [that inflation print]) -- here and there, there's apparently not much to feel good about in the present global scheme of things...  As reflected in the attitudes of the macro actors whose work I have serious respect for. I.e., locating a bull right here is, frankly, harder than locating Waldo:

Call me crazy, or crazily contrarian, but all this doom and gloom is beginning to strike some long-dormant bullish nerves in yours truly.

Yes, the "darkest before the dawn" metaphor indeed applies to the financial markets -- make no mistake, I can show you charts!

Now, that said, our analysis says we ain't there just yet... Recall that our technical work says 3,500 looks doable as a durable bottom... But that assumes that any recession going forward turns out to be a mild one by historical standards -- one that doesn't see corporate earnings end up in the proverbial gutter... Which, for the moment, remains our base case.

Our thesis rests on a view that the US consumer remains in relatively decent financial health (as evidenced by the consumption and employment data referenced above), along with other likelihoods, such as our view that odds favor a significant stimulus push by China post the upcoming "20th National Congress" where they'll anoint Xi for an unprecedented 3rd term... That -- a potential boost to the world's second largest economy -- is, let's say, meaningful, in the global scheme of things... 

And while, indeed, the Fed looks to stay hawkish till something cracks (notice I didn't say "breaks"), the fiscal will among the world's governments -- in this emerging era of populism -- is, make no mistake, historically high... I.e., politicians will intervene whenever consumer pain becomes remotely palpable, spending whatever it takes to take care of their respective constituents... Couple that with the waves of infrastructure spending to come, and -- persistently higher inflation notwithstanding -- well... let's just say that makes for an opportunity-rich global investment environment for years to come...

Last evening I listened to BCA's Chief Emerging Markets strategist referenced below make his bearish case for equities... He presents a compelling fundamental argument for going careful with equities going forward... His technical assessment has him targeting the S&P bottom at roughly 8.5% below our current target... Although, per the last paragraph below, some of his fellow BCA strategists don't share his bearish view:

BCA’s Emerging Markets strategist highlighted that technicals suggest that there is still scope for the equity rout to continue. Specifically, the chart above highlights that the S&P 500 recently broke below its three-year moving average – a key resistance level in the past. Critically, the next technical support level is around 3200 – at the benchmark’s six-year moving average. This would entail another 12% drawdown from current levels.

To the extent that bond and equity returns have been positively correlated this year, further increases in Treasury yields could continue to hurt stocks. On this front, BCA’s bond strategists do not think that the bond bear market is over. They anticipate another upleg in Treasury yields before the fed funds rate reaches its peak. Unless there is a shift in the stock-to-bond relationship, higher yields bode ill for stocks.

However, some BCA strategists maintain a more favorable near-term outlook for equities. In particular, our Global Investment strategists expect easing inflation to push real wages into positive territory. This will lead to a recovery in consumer sentiment and spending, which will ultimately boost corporate earnings, and in turn equities.

Note, in that last paragraph, that BCA's global investment team happens to share our currently sanguine view over the present state of the consumer... 

Asian equities were mostly lower overnight, with 14 of the 16 markets we track closing in the red.

Europe's actually seeing some green so far this morning, with 17 of the 19 bourses we follow trading up as I type.

US stocks, however, are lower to start the session: Dow down 171 points (0.56%), SP500 down 0.49%, SP500 Equal Weight down 0.61%, Nasdaq 100 down 0.55%, Nasdaq Comp down 0.42%, Russell 2000 down 0.52%.

The VIX sits at 32.29, up 1.41%.

Oil futures are down 2.27%, gold's up 0.40%, silver's up 0.59%, copper futures are down 0.20% and the ag complex (DBA) is down 0.10%.

The 10-year treasury is up (yield down) and the dollar is up 0.21%

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 8 -- led by long-term treasuries, silver, gold, AT&T and intermediate-term treasuries -- are in the green so far this morning. The losers are being led lower by MP Materials, oil services stocks, base metals futures, Disney and semiconductor stocks.

"...we have to watch movements in the supplies and demands of both the real economy and the financial economy to understand what is likely to happen financially and economically."

--Dalio, Ray. Principles for Dealing with the Changing World Order

Have a great day!


  1. LOL. I can't even find my car keys. How am I going to find Waldo? Thanks! Have a great weekend!