- This week's Alpha Trader features hosts Aaron Task and Stephen Alpher talking about the market correction with Wolfe Research's John Roque, and pondering the exploding government deficit with Sri Thiruvadanthai of the Jerome Levy Forecasting Center.
- The technical indicators were screaming overbought before last week, says Roque, but the brief selloff isn't yet enough to move them into oversold territory. The conventional wisdom says this is a necessary, but short correction, and then the bull run will continue. Roque isn't so sure about that, and has his eye on an S&P level of 3,100 (vs. the current 3,250).
- Alongside that modestly bearish outlook on stocks, Roque thinks oil is setting up to approach its 2016 low in the $30s. He's also a fan of gold, noting the yellow metal is testing and ready to breach levels last seen seven years ago.
- The annual U.S. budget deficit is expected to top $1T this year (and stay above that level for the foreseeable future), but Sri Thiruvadanthai doesn't find the news particularly troubling. He reminds that the U.S. prints its own currency - there's no need to default unless a political decision is made to do so.
- Instead, it's inflation that's the real constraint, says Thiruvadanthai, but there's no sign of it. The Fed, in fact, has missed its inflation target each year since 2012.
- The larger question might be why the deficits are so large given what appears to be such a strong economy. It suggests to Thiruvadanthai that "below the hood," the economy isn't doing as well as advertised, and in fact might be in recession were the deficit narrowed.
This week's Alpha Trader podcast features Wolfe Research Managing Director John Roque, and Jerome Levy Forecasting Center Director of Research Sri Thiruvadanthai.
Roque's technical indicators prior to last week were clearly pointing to a coming correction, and the coronavirus scare was the excuse needed for markets to begin heading down. Folks are already wondering when to buy the dip, but Roque notes the move lower has been very modest both in terms of points and time. With the S&P 500 (NYSEARCA:SPY) at around 3,250, Roque's got his eye on 3,100 before he might consider turning bullish again.
The action has been particularly ugly in energy (NYSEARCA:XLE), with one midcap index Roque follows down a full 23% just in January! On this, the charts are pretty clear to Roque - crude oil (NYSEARCA:USO) looks set to test its 2016 lows in the low-$30s (vs. the current $51). Gold (NYSEARCA:GLD), on the other hand, is looking very good on the charts, plus - as is typical - sentiment is lame, and the yellow metal remains "underowned" by most. Roque's looking for a new all-time high this cycle, surpassing $1,921 seen in 2011.
Before we get too bearish on equities, Roque reminds that the Federal Reserve is always at the ready to support markets with whatever tools it has.
The U.S. budget deficit is now forecast to top $1T this year, or 4.3% of GDP, and stay at or above those levels for the foreseeable future. Sri Thiruvadanthai isn't a full-on believer in Modern Monetary Theory (which is wholly unconcerned with deficits for a government that prints its own money), but those folks do have some valid points, he says - most importantly, that default can't happen unless a political decision is made to do so.
The flip side of the choice not to default, however, is inflation, and that is certainly a valid concern on occasion, says Thiruvadanthai. This, however, isn't one of those times. The Fed has missed its inflation target (from the downside) for eight years running, he says, and the streak looks to be going to nine in 2020.
More concerning to Thiruvadanthai is that the deficits are so high given 50-year lows in unemployment. It suggests to him that "beneath the hood" the economy isn't as strong as it seems, and is being propped up by the deficit.
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