SPGP - The Stock Market Has Reached A Fork In The Road

2023-04-25 11:41:00 ET

Summary

• The month of April has seen the S&P 500 move within less than a 100-point range during regular sessions, adding only a few points more if one were to include overnight futures trading.
• It is absurd for the Fed to be hiking interest rates next week into an inverted yield curve when nearly every market-driven Treasury yield over 6-months maturity is below the Fed funds rate.
• The coming debt ceiling showdown is likely to increase volatility in the stock market, resulting in a spike in the VIX index, as it did in 2011.

The month of April has seen the S&P 500 move within less than a 100-point range during regular sessions, adding only a few points more if one were to include overnight futures trading. This is precisely why the VIX (volatility) index declined to a new 2023 low of 16.17 last week.

I don’t think the VIX index will stay this low, but right now, it is unknowable if the market will break out this week or in early May. The S&P 500 could actually move a little higher if earnings from the big tech companies (reporting soon) turn out to be very good, but I have no way of knowing that ahead of time. If earnings are not up to par, that will likely push the market lower, so it is fair to say that the S&P 500 is at a crossroads. As the legendary Yogi Berra famously said: “When you come to a fork in the road, take it!”

It is absurd for the Fed to be hiking interest rates next week into an inverted yield curve when nearly every market-driven Treasury yield over 6-months maturity is below the Fed funds rate – generally, the longer the maturity, the lower the yield. The bond market is telling Chairman Powell: “Stop, you’ve done enough,” but will he listen? Fed governors and regional bank presidents have admitted that the SVB failure is the equivalent of 25-75 basis points of rate hikes, even though in reality no one really knows.

Given that, the Fed has already overshot.

U.S. Government Debt to GDP Ratio

The coming debt ceiling showdown is likely to increase volatility in the stock market, resulting in a spike in the VIX index, as it did in 2011. Today’s Republicans feel it is necessary to hold Joe Biden’s feet to the fire. No doubt this is some type of positioning for next year’s elections, on both sides of the aisle. While I think that the COVID spending of 2020 was necessary to prevent a second Great Depression, continued spending in 2021 and the lag in Fed response were damaging to the outlook for both inflation and growth.

What is Warren Buffett Doing in Japan?

Warren Buffett recently traveled to Japan as he increased his stake in the top five Japanese trading houses (the “sogo shosha”), namely Marubeni, Minsubishi, Itochu, Mitsui, and Sumitomo. The Japanese stock market has been a disaster since 1989, although it has appreciated well since its 2008 low, much of it due to extreme monetary easing, i.e., negative policy rates and yield curve control. The balance sheet of the Bank of Japan is horrific compared to the Fed’s, as they own more than half of the JGBs outstanding debt.

It would appear that Warren Buffett is making a bet that Japan is out of deflation mode, which should be beneficial to the resurgence of the Japanese economy and, in that regard, the business of the big five (sogo shosha). The extreme deficit spending of the developed world to fight COVID is what resulted in the present global inflation tsunami and this may have finally helped Japan move out of deflation.

It is true that Japan has serious demographic problems that are a big negative for future GDP growth. They can be easily fixed with legal immigration, but Japanese society is very much against that option. If the Japanese government can figure out how to motivate the Japanese people to have more kids – and I am not quite sure how they can do that – Japan can turn out to be one heck of a bull market story.

Japanese Government Debt to GDP:

In addition to Buffett’s big five, other big beneficiaries of Japan moving out of deflation would be major Japanese banks whose stocks have been decimated by years of negative rates and yield curve control. Higher interest rates and some inflation can do miracles for the Japanese banking system, if they persist.

Navellier & Associates does not own Silicon Valley Bank ("SVB") in managed accounts. Ivan Martchev does not own Silicon Valley Bank ("SVB"), personally .

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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