Markets stocks

Color Me Skeptical

In what certainly felt like a combination of capitulation and forced buying, US equities accelerated into the close on Wednesday, adding to a historic rally and leaving bulls and bears alike incredulous.

The S&P logged its best day since early July, rising for a ninth session in 10, pushing further into overbought territory in the process.

Stocks haven’t been this extended since the halcyon days following the Trump tax cuts (or, put differently, since the eve of Vol-pocalypse).

Notably, it was another “SUVU” day — “stocks up, vol up”, that is.

Even as the S&P climbed more than 1.5%, the VIX rose. Similarly, VXN jumped even as the Nasdaq 100 gained. In fact, Wednesday was the third straight session in which big-cap tech rose with implied vol.

This is symptomatic of the dynamics discussed here at length over the past several days (see here and here, for example).

It’s a precarious setup, but Wednesday at least saw the S&P and the Dow outperform the Nasdaq. The equal-weight S&P hit the highest since late February. The Dow topped 29,000. On the surface of it, that suggests broader participation but frankly, it’s a little late for that. Big-cap tech now trades 30% wide to its 200-day moving average, double the premium seen on the S&P.

The gains came even as Mitch McConnell cast further doubt on the prospects for another virus relief bill. “I don’t know if there’ll be another package in the next few weeks or not”, McConnell told folks gathered to hear him speak at a hospital in Kentucky.

Earlier in the session, Larry Kudlow floated a piecemeal approach for the umpteenth time. “Where we agree, why not go for a targeted bill?” he wondered.

I can answer that. Because almost invariably, the GOP would not come back to the table once a smaller, “targeted” package is passed.

McConnell has made it abundantly clear that nearly two-dozen Republicans don’t support any additional stimulus at all. Given that, the idea that they’re going to come back and do more if it’s necessary (as Steve Mnuchin has variously suggested) seems laughable. Considering staunch GOP opposition to additional relief and Democratic opposition to half-measures, there is virtually no chance of anything getting through the Senate.

This would appear to doom the talks to a fate entangled with broader government funding discussions, which in turn raises the odds of what I’ve called a “grand fiscal failure”, although I suppose “grand” isn’t really the appropriate adjective.

For what it’s worth, Loretta Mester reiterated Wednesday that “it’s going to take some time to get into a sustainable recovery”. “We’re going to need support both on monetary policy and fiscal policy”, she insisted, during a virtual event.

Meanwhile, geopolitical tensions are on the boil, both with regard to China and, now, Russia.

The US on Wednesday placed additional restrictions on Chinese officials, curtailing their ability to move — literally. Mike Pompeo said senior US-based Chinese diplomats will need permission to go to American universities. Clearance will also be required for meetings with local government officials and even for cultural events involving 50 or more people outside of diplomatic missions. Pompeo called the move “a direct response to the excessive restraints already placed on our diplomats by the PRC”.

As for Russia, the Kremlin is poisoning people again, Germany said. Alexey Navalny — who fell ill on a plane last month and was eventually allowed to leave Russia to be treated in Berlin — was subjected to novichok, according to German officials. Angela Merkel is the furthest thing from amused.

Boris Johnson doesn’t like it either. “It’s outrageous”, he seethed. “The Russian government must explain what happened to Mr. Navalny”.

With all due respect to everyone involved, there’s nothing to “explain”. Navalny was, in all likelihood, poisoned for his politics. It’s just that simple. And even as it’s wholly unacceptable, it’s not at all surprising.

The ruble dropped the most in nearly three months as the market now fears (more) sanctions.

The NSC called the apparent poisoning “completely reprehensible” and promised the US “will work with allies and the international community to hold those in Russia accountable, wherever the evidence leads”.

Color me even more skeptical on that promise than I am on the notion that the S&P can continue to climb the wall of worry uninterrupted all the way into a disputed US election outcome.


9 comments on “Color Me Skeptical

  1. derek says:

    Unless the Chinese were somehow involved. ..

  2. payshunt says:

    Where we agree, why not go for a targeted bill?” he wondered.

    I can answer that. Because almost invariably, the GOP would not come back to the table once a smaller, “targeted” package is passed.

  3. runamok says:

    Poisonings for political opponents outside the government and helicopter crashes for dissenters within the government.

    This is almost dying to start going short.

  4. I am not sure why all the hand wringing. There never was going to be a deal in august due to senate being out. Mitch was not going to call senate back from campaigning to pursue Democrat priorities. The President bought himself about 30 days dovetailing nicely with Senate schedule.

    Earliest of a vote is late in September when it becomes more clear that Virus is not dying out and when it is more clear the economic pain experienced by the citizenry. In fact pain is what his base wants to maybe a deal is not possible. Only he can sweep Meadows aside and I do not see that happening until his poll numbers weaken. Or alternatively becoming clear that whilst many people may publicly support him in front of vociferous Trumpsters, they may not vote in private for him.

  5. I will also conjecture that trapping Trump into a government shutdown could have been Pelosi’s best case outcome all along. If Trump does not reverse and Pelosi is able to stick him with the shutdown then she may have sealed his fate.

  6. uptownguy says:

    zilch progress does not favor trump, no matter how maniacally he frames it, because even his base won’t really believe his rants and some will get fed up – which dynamic won’t be true on the other side. I think the Dems will therefore pursue a zilch progress strategy on pretty much anything from here on out, and leave it to the voters to opine on how happy they are.

    Which means turning out the base and suppressing voters are the things to watch.

  7. Question is whether this all allows market to form at least an interim top or not.

  8. Techfomo says:

    To mitigate ‘disputed US election outcome’ risk, what actions are each state taking to minimize voter fraud ? This is yet another ownership area where the states have ownership responsibilities. As a country, the Feds do not control the voting booths. On another note of ‘who is discouraging voting (or encouraging). The Republican Party of Florida is actually sending mail (which is being delivered) stating ‘request your absentee ballot’ and ‘president trump supports absentee voting’.

    • dayjob says:

      The states already take plenty of action to minimize voter fraud even as the president explicitly urges people to actually commit voter fraud. Following the president’s comments, North Carolina even went so far as to explain the checks they have in place and told people how they can validate their vote online.

      It’s become abundantly clear that the president wants to sow as much doubt as possible about the outcome of the election to create one more potential avenue to maintain power. The president has also discouraged voting by mail repeatedly in order to suppress turnout because he thinks more people voting means it is more likely that he will lose (which again he has explicitly stated). Ironically, discouraging mail-in voting is actually a terrible strategy and forcing Republican leaders at the state level to try to counteract his stance because the only people who will listen are his own voters.

      Also, Republicans at a state level absolutely take actions to discourage voting in heavily democratic areas by limiting the number of polling places which leads to longer wait times to vote. Additionally, given the lack of evidence of voting fraud, it’s clear that voter ID laws are intended to disenfranchise democratic-leaning constituents despite what certain politicians want people to believe. If Republicans actually cared about encouraging people to exercise their rights as citizens, there are numerous things they could do that shouldn’t be controversial like making election day a holiday (or just moving election day to a weekend), automatic registration, or even universal mail-in or early in-person voting. There is a reason why one party happens to have excuses as to why none of this is ok even though these are common practices among other developed countries.

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