The debt ceiling debate had been in the news cycle recently. Democrats hold a majority in both chambers, yet blamed the Republicans for playing a dangerous game of chicken with the public purse. It was a replay of every debt ceiling debate for the past 30 years.
There is no fiscally conservative majority in Congress. As the public debt has grown, Congress has readily authorized the increase in their own spending limit. In typical Congressional fashion, they kicked the debt can down the road. However, this can didn’t get kicked very far. Another debate on the debt ceiling will occur in late November to early December. This is because the debt limit only got kicked to December 3rd. Even though this news seems like a dud, it really lit a fire under the general market indexes.
This whipsaw action has reminded me of an old trader’s mantra, “the biggest stock market rallies come in bear markets”. Essentially it means that the biggest up days in the stock market happen when it is going down. This is because you need serious volatility to incite a big rise in the market and there is serious volatility when the general market is in decline. This ties into another common saying, “the markets take the stairs up and the elevator down”. Once the market starts to go down, it can go down in very rapid fashion, leading to high volatility.
With this in mind, I decided to take a peek at the keys to the market.
The yield curve continues to look good. It finished yesterday with a 123 basis point spread indicating that banks are making money by borrowing short and lending long. This is expansionary for the economy.
The most recent money supply data came out on September 28th.
It is above the average for this time of the year. If 2020’s liquidity flood hadn’t happened, this would look like a tremendous opportunity for the general market. However, since so much money was added to the M2 base last year, the stock market needs increasing amounts of money to keep the party going. This could be one of the reasons the market has traded the way it has since mid-September.
The final key is margin debt.
This data was last published by FINRA on September 24th. It looks like traders are anxious to take on more debt to buy stocks. In all the years that FINRA has been keeping tabs on margin debt, it has never been this high. It should translate into stock market strength.
All three major market keys are pointing towards the market climbing higher but it isn’t. This has me concerned. I suspect three things could be happening:
First, investors are concerned about Congress’s ineptitude. The democrats are trying to get these monster bills passed and seem to be having problems getting everyone in their party on the same page. Debt ceiling negotiations, Biden’s budget bill, the infrastructure package could all be leading worries for traders causing them to hold back.
Second, the increase in the M2 money supply might not be enough to get the market over the hump. This would be much more concerning than Congress being inept. The stock market needs an ever increasing amount of money to attain new highs. The 10%+ 13-week annualized figure for the past 3 weeks might not be enough.
Lastly, there could be a great rotation taking place. With interest rates beginning to climb and inflation running hot, the high flying growth stocks that were priced to perfection are beginning to look less attractive. These growth stocks need low interest rates to look good to investors. This is because of the discount cash flow model that they are predicated on. When interest rates rise, future cash flows aren’t as juicy, reducing the projected current price. Investors then begin to flock toward value stocks and real assets.