Pro Perspectives 12/20/21
December 20, 2021
Over the past month, we've talked about the reappointment of Jay Powell, and how his subsequent flip-flop on inflation may have made it much more difficult for the Democrat controlled Congress to justify the final fiscal spending bazooka (i.e. the transformative "green" and social spending plan).
If anything, the new positioning by the Fed, from inflation denier to inflation fighter, has given the swing voter in Congress (Manchin) the cover to reject the administration's big wish-list spend.
And here we are, Manchin has now given it a hard no.
As we've discussed in past notes, at this stage, "a smaller deal, or (even better) a no deal, would be among the best outcomes for markets and the economy. It would be a relief valve on inflation pressure. And it would remove the obstruction of uncertainty on a recovering economy that already has $5 trillion of excess money floating around."
So, at the moment, we have a no deal. This should be good for markets, good for the outlook.
With that, let's take a look at some key charts, after this morning's knee jerk selloff …
As you can see in the chart above, the S&P 500 traded into this big trendline today. This line represents the rise from election day, which was on the anticipation of a big fiscal spending agenda.
We have indeed had another $1.9 trillion, plus another $1.2 trillion. And as we trade into the support of this big trendline (a little more than a year later), we have very accommodative monetary policy (still), strong corporate and consumer balance sheets, a hot labor market and the expiration of debt and real estate moratoriums (which should fuel employment and economic activity).
With this mix, now excluding a toxic and disruptive inflation fire (with a no deal on "Build Back Better"), we get a bounce from this trendline today.
And we have similar technical support holding today in the Nasdaq …
The Nasdaq trades today into this big line, which originates from the March lows — the day the Fed fired the bazooka of monetary policy (intervening in the corporate bond market).
With the above in mind: With these big market proxies bouncing this afternoon from technical support, and with the prospect of an optimal outcome coming from the recent fiscal spending negotiations, this next market (chart) becomes the most attractive buy into the final trading days of the year…