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Fundamental Factors Focus:

  • US optimism peaking, which may mean the risky asset rally has further to run
  • Aggressive supply of base metals, energy is increasingly dependent on global demand picture
  • Signs of a ‘dollar shortage’ that aligns with risk off markets remain absent

Capital flows, business activity, a premium of borrowing costs, and consumer confidence are foundational components of an economy that sees investors rushing into risky assets, and shying away from investments that don’t capture the upside.

Optimism Reigns Stateside

Two data points have recently moved to extremes not seen since the kick-off of the Regan economic boom in the early 1980s that saw interest rates and inflation drop alongside tax cuts enacted that boosted confidence and productivity.

3 Measures Of Economic Activities Hitting Multi-Cycle Highs, Recession Unlikely

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Data source: Bloomberg, Chart created by Tyler Yell, CMT

The first data point, the Institute for Supply Management (ISM) Manufacturing Business Survey just aligned with the NFIB small business optimism index to hit levels not seen in years. For the Small Business Optimism Index, it recently reached the highest level since 1983 where the ISM hit a 13-year high last month.

Friday morning also saw a 14-year high of the University of Michigan Consumer Confidence reading with an all-time high with the current conditions gauge that measures American’s perception of their personal finances hitting an all-time high.

What is worth noting in both cases is that both in the early 80s, and ISM in May 2004 was seen at the early- to mid-point of an economic expansion. Should a similar development be in place, traders should keep their low-probability high-impact scenarios saved for their NCAA March Madness Brackets, and the high-probability mid-impact events applied to investing.

In other words, and as I argue in Ichimoku Charts that Matter[1], shocks tend to happen in the direction of the trend. Rallies typically don’t end with a bang opposing extreme optimism like we see now, but rather, rallies tend to rollover, and the sharp downside moves that make headlines that turn into a bear market often come off a bad news crescendo when investors tend to sell first, and ask questions later.

Currently, we seem to be far away from a rollover as optimism reigns supreme. Also, aside from the 2001/2 recession, peaks in confidence tend to happen early- to mid-cycle favoring an extension of the current risky-asset buying environment.

Unfamiliar with Key FX Fundamental Factors to watch? No worries, I created a primer for you here[2]

You Can’t Have Demand without Optimism, and Demand Is up per Oil Data

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