I’m unexpectedly on the road today, so I wasn’t in a position to offer up the usual morning note.

As I suspect you noticed, equity markets staged a nice rally today that was essentially follow through on yesterday’s bounce; that by all appearances was inspired by some political give on the debt ceiling. 

Today’s action should make sense to you given our messaging from last week, which I repeated yesterday, and will one more time today. The first 3 bullet points under “optimistic expectations” have very high odds of “success.” The 5th (with regard to “lower tax hit than originally threatened”) is looking more likely of late as well:

“Is there cause for optimism around equities heading into the fourth quarter? Sure. Is there nevertheless some serious risk in the overall setup? Yes. Should we, even if the optimists have it right, anticipate some serious volatility in Q4? Absolutely!

Ironically, much of the stuff that allows for optimism is the stuff that defines much of the risk as well.

Optimistic expectations:

• No U.S default. Democrats can avert that all by their lonesome. And have all the political incentive to do so.
• Infrastructure deal gets passed.
• China successfully/bullishly kicks property bubble can down the road.
• Covid fears/numbers abate.
• Monster US spending package passes with lower tax hit than threatened. 
• Cash-rich companies announce dividend hikes and aggressive share buyback plans during the upcoming earnings reporting season.

Risks:

• The factions within the Democratic party get so sideways (i.e., progressives [via threats around the debt ceiling and infrastructure] leveraging their shot at reconciliation to get their spending/taxing agenda passed) that they actually fumble the ball. 
• China missteps and pierces its property bubble.
• Covid 
• Tax hikes resulting from the US spending plan spark an equity market selloff.
• Companies issue disappointing earnings guidance based on supply constraints and rising input costs.

Now, the above lists are anything but exhaustive. For example, we’ve checked a plethora of boxes across our list of the characteristics that typically mark a market top (gotta stay hedged right here!). However, the lack of net recessionary conditions says the odds of an ugly protracted bear market in equities remain relatively low.” 

Have a great rest of your day!
Marty