So the markets got what they thought they wanted: more stimulus. Now what?
From a technical perspective, it’s unclear. While the S&P 500 set an all-time intra-day high last Thursday, the pricing pattern does not yet appear to be a significant break-out. In fact, when the bill crossed Biden’s desk on Friday, markets barely managed a higher close from the prior day.
So what is going on?
For one, the near-universal conversation is about inflation. Not if – but when – does inflation take hold?
The Federal Reserve seems to think it’s a ways off. And while the 10-year treasury has moved considerably on a percentage basis, on an absolute basis it’s still near historic lows.
So what are we to believe? Is there inflation, or is it contained?
The strange answer is, both and neither.
Take a look around. There is inflation. Already, fuel, energy, food, and real estate have moved significantly higher. Most commodities (excluding precious metals) and crypto currencies have also moved higher.
The question is, is it contained? And, regardless of the real answer, policymakers believe it is. At least, until it isn’t…
Intuitively, it stands to reason that printing tons and tons of money in the form of a massive stimulus program would lead to massive inflation, a devaluing of the dollar, and a host of other economic dislocations.
That seems to make sense.
What’s lost in the equation is the massive demand destruction that has been caused by covid.
Large portions of the economy are still being significantly impacted by covid. This economic anchor has weighed down certain segments of the economy (literally killing some parts of it). This is the demand destruction that gets glossed over in the conversation. It’s as if folks have accepted things after a year. Those that didn’t make it are gone. The survivors move on.
Here’s the thing though, it has to get factored into the equation… demand destruction during the shut-down. But more importantly, demand creation after the re-open.
As long as parts of the economy are still encumbered, inflation will likely remain partially contained. It’s a mechanical result. The supply/demand curve is affected by the fact that either a) the widget can’t be made, or b) the unemployed have fewer resources.
Stimulus sort of plugs a gap for resources (although not without longer-term consequences). That, in effect, props things up. But what does it do to repair the supply side of the chart? Answer: little to nothing.
Now, as the economy re-opens, the supply side of the curve improves. And, in theory, folks go back to work. So the demand side of things should balance. Then all you have to do is… oh yeah… repay the debts… with more taxes… which reduces the money supply…
And that’s really the underlying issue: money supply. Who has access to the money to spend? For real estate, you can borrow. And for the stock market, in the form of margin, you can borrow. But for food, utilities, rent? Not so much.
So there’s some can kicking going on here. And the though, certainly, is that it’s easier to deal with repercussions during times of strength, so let’s worry about it later.
The problem is, later has never arrived. In periods of economic strength, there has been no savings. In periods of economic weakness, there’s been more borrowing. The equation never gets balanced.
Well, eventually, markets will balance the equation. You can’t manipulate and manage things forever… or at least it’s never been successfully applied in history to this point. But that doesn’t seem to stop some from believing it’s worth another shot. (But I digress.)
Where does that leave the markets today?
Short answer: the probably go higher from here.
Yes, you read that correctly. The probably go higher from here.
Because there is nowhere else for money to go, and it’s still cheap to borrow. There is access to capital and leverage in the markets. There’s optimism the economy will reopen. And, perhaps most important of all, it fulfills the unwritten law of market irony. Things often behave different than expected for longer than folks think.
The larger technical picture at play suggests the SPX is still headed towards the 4200 level. Once that area is achieved, it’s probable there will be a bit of a trader’s pull-back as markets reset, rates move higher, and multiples begin to come in. Projections show this beginning to show up in late April.
If that holds true, there’s 2-to-6 more weeks of upward movement before this market gets so far over its skis it trips itself.
Here’s a look at the 2021 projection for reference:
For this week, look for a positive bias. Technical trends suggest a virtually flat week ahead. However, if markets gain some traction, the SPX could test as high as 4021. Downside support is at 3858.
Part of why this week may be relatively sideways is because the FOMC is meeting. Any change in guidance on Wednesday (quite unlikely) could impact things. Look for some version of guidance suggesting further accommodation (code for cheap money). As long as the general trend of rates remains low, multiples can stay higher. If a move does occur, it’s likely to be on Tuesday (movers in advance of the meeting) and Thursday for those repositioning after the meeting (this, by the way, is just an educated guess – that’s often how it goes – but hey, no guarantees).
Assuming rates remain unchanged, the current trend higher should continue. Even a hint at a rate change will mean it’s time to talk about the next phase of this market (and multiple contraction).
Note, the projections above for the year suggest a decline in multiples in late April. This also happens to align with the next FOMC meeting on April 27-28. Stay tuned.
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