Opinion: Why the stock market signals a ‘merger’ until the end of 2021
What are the odds of a US equity merger for the remainder of 2021? Based on history, we can expect stocks to hit a low in early October and enter a period of seasonal strength until the end of the year.
Ned Davis Research recently sketched a bullish year-end scenario for global equities, noting that the fourth quarter was the strongest in recent years.
Risk appetite indicators are improving steadily, but have not yet risen enough to trigger a buy signal. These readings are consistent with my fourth quarter sector review, which also found signs of cyclical strength and reflation, but no general confirmation.
Feeling of support
The sentiment backdrop is increasingly favorable for a breakthrough, although the readings have not fallen to extremes of panic. For example, the NAAIM exposure index, which measures the sentiment of registered investment advisers, recently fell but did not cross the 26-week Bollinger Band. Low Bollinger Band penetration has been a strong buy signal in the past.
These conditions lead me to believe that the risk / reward ratio of US equities is now trending upward. The maximum drawdown of the S&P 500 SPX,
of its peaks is -5%. It’s conceivable that stocks will pull back, but 2-3% more weakness is likely to trigger panic levels in many sentiment patterns. Although I am cautiously bullish, I am not yet ready to go all-in.
Supply chain bottlenecks
Won’t rising energy prices create inflationary pressures and force the Fed to act? Fed Chairman Jerome Powell said inflationary pressures had to be transient due to supply chain bottlenecks, but allowed the transitional period to last longer than expected.
Headlines could see growing hysteria over shortages in the coming weeks as Christmas approaches and produce is not available in abundance. In reality, the shortages are attributable to a supply shock due to growing demand in the face of limited manufacturing and transportation capacities. Central bankers raising interest rates will not make the semiconductor shortage go away, nor will it increase shipping and trucking capacity.
While there are many bottlenecks, especially in the movement of materials to factories and goods from factories to vendors, orders for goods that will last (relatively) long continue to improve. There is simply no downward pressure on the producer sector of the US economy at this time.
The next major data release will be the November Jobs Report. How will the juxtaposition of COVID cases, the expiration of emergency assistance programs, supply chain bottlenecks and widespread reports of labor shortages affect the situation in the world? ‘use ? Powell said after the last FOMC meeting that it would take a big mistake in the November report for the Fed to rethink its plans to cut its QE purchases. This is what reflation looks like.
Tax wild cards
On the other hand, investors will have to contend with Washington’s confused fiscal situation. This time around, there are just a lot of bullets in the air and a lot of moving parts of fiscal policy. Each problem is separate but related and any one of them could derail, affect fiscal policy and disrupt markets.
Fund the federal government, which can be done with a permanent short-term resolution
The debt ceiling
The infrastructure bill
The process of budget reconciliation.
Here’s how President Joe Biden’s proposals could affect future politics and change the lives of Americans:
- Transport: Subsidies for electric vehicles (EVs), expenses for EV infrastructure such as public charging stations, subsidies for public transport, especially for train travel.
- Health care: Extend Medicare coverage to dental, vision and hearing benefits, free Medicaid coverage for more low-income Americans, lower drug prices.
- Childcare and education: Free daycare for low-income Americans, two years of free preschool before kindergarten and two years free of community college, and 12 weeks of paid family leave to care for a sick family member.
I have no idea how this wishlist will play out in the showdown in Washington. Make no mistake that the legislative powers are there to make a deal. House Speaker Nancy Pelosi is a quintessential vote counter, Democratic Senator Chuck Schumer’s Majority Leader understands his caucus, while Biden enjoys wide approval among Democrats and has a strong legislative record in the Senate.
In all likelihood, the ambitious Democrats’ agenda will be watered down. As an example, Biden’s original proposal was to increase the corporate tax rate from 21% to 28%, although expectations were lowered to 25%. PredictIt’s probabilities show that the odds of not raising taxes or having a tax rate below 25% increase. As a 25% rate has been widely discounted by the market, a lower tax rate would be a welcome surprise to equity investors.
Overall, the stock market could prepare for a period of positive seasonality until the end of the year, which would be triggered by a reflationary boom. Yet a number of important cyclical triggers have not been triggered. At a minimum and in the short term, the S&P 500 needs to recover and regain its 50-day moving average as it tests Evergrande lows.
Cam Hui writes the Humble Student of the Markets investment blog, where this article first appeared. He is a former equity portfolio manager and sell-side analyst.
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