An unexpected pivot from Senator Joe Manchin… solar stocks explode… bullish sentiment is spreading over the markets… be careful before you leap

Last week, West Virginia Senator Joe Manchin performed an unexpected policy U-turn…

For months, Manchin has been thwarting flagship climate legislation from the Democrats, citing concerns about reckless government spending and its impact on the national debt as well as today’s highly inflationary economy.

No more.

After closed-door negotiations with Senate Majority Leader Chuck Schumer, Manchin announced he’s on board with a domestic policy bill with stated goals of lowering healthcare costs and addressing the climatecrisis.

In response, this happened…

This is a chart of the Invesco Solar ETF TAN surging 14% last Wednesday and Thursday.

Keep in mind, TAN holds 46 different solar stocks, and not all of them are winners.

For nearly four-dozen stocks to collectively surge 14% in two days, that’s majorly bullish.

***If we single out some of the top-tier solar plays, the two-day returns were extraordinary

Over the same two-day period, First Solar climbed 20%, Enphase surged 27%, and Sunrun erupted 38%.

But what was most eye-catching was the buying volume, something our editor-in-chief and fellow Digest-writer Luis Hernandez brought to my attention.

Below, we look at TAN’s chart again with volume shown in the lower panel. We’re seeing six months of price-action and returns to provide context.

Look at the skyscraper volume-spike.

In the wake of Manchin’s pivot, investors are storming into solar, and understandably so — billions of government dollars are poised to flood the sector.

For more, here’s our hypergrowth expert Luke Lango:

…the [legislative] package [signed off on by Manchin] will inject $739 billion into a hobbling U.S. economy, and $369 billion of that will be poured directly into climate and energy programs.

The investment implication, of course, is that it’s time to buy clean tech stocks. They’re about to get a near-$400 billion tailwind, the likes of which amounts to the biggest federal tailwind they’ve ever seen.

Our portfolios — which are heavily overweight clean tech — benefitted tremendously from this news [last week].

We don’t think the tailwinds will stop anytime soon. Looking at the chart, it looks like solar stocks are due for a 50% melt-up in a hurry!

One of Luke’s favorite clean energy stocks in his Early Stage Investor portfolio has exploded 38% since last week’s news. I should point out that this same stock is up an eye-watering 107% since mid-May.

It’s not just the solar sector that has been climbing. In recent weeks, we’ve seen bullishness extend through the wider market.

***It feels like bullish sentiment is beginning to take back control over the markets, but let’s try to poke holes before we get too excited

I’ve been seeing a wave of bullish headlines in recent days.

For example, here’s one from CNBC last Friday:

Yes, the bear market could be over — we certainly hope it is.

And in recent Digests, when analyzing the potential timing of when stocks might hit their lows, we’ve concluded that we could be in that period today.

But as we often say here in the Digest, the wise investor seeks out reasons why his/her narrative could be wrong. Let’s look at a few potential flies in the ointment.

First: The calls for easing inflation are growing louder, though for now, at least, inflation remains very high. And that will continue to weigh on earnings.

Last Friday, one of the Fed’s preferred inflation metrics hit its highest level since January 1982.

From CNBC:

The personal consumption expenditures price index rose 6.8%, the biggest 12-month move since the 6.9% increase in January 1982.

The index rose 1% from May, tying its biggest monthly gain since February 1981.

Excluding food and energy, so-called core PCE increased 4.8% from a year ago, up one-tenth of a percentage point from May but off the recent high of 5.3% hit in February.

On a monthly basis, core was up 0.6%, its biggest monthly gain since April 2021.

Inflation is still very much here. But the bullish investor could say: “Sure, but the upcoming Consumer Price Index reading on August 10 will show a decline from its latest 9.1% reading. That’s because oil prices have fallen significantly.”

That’s likely true. However, even if the CPI falls to, say, 8% or 7%, such an elevated level will still have an eroding effect on corporate bottom lines and consumer wallets.

We made the following point in the Digest last week, but strong profits from oil stocks have been masking some relatively poor earnings results from the broad S&P here in Q2 earnings season. In fact, if we exclude the energy sector, then earnings growth is likely to come in sharply negative this quarter, compared with last year.

Persistent inflation in the 6%, 7%, 8% range will only increase that.

***Meanwhile, are we really to think that the Fed hiking rates to, say, 3.5% is going to kill 9% inflation?

Legendary hedge fund manager and billionaire Stanley Druckenmiller said: “Once inflation gets above 5%, it’s never come down unless the Fed Funds rate has gotten above the CPI.”

We’ve made this same point in the Digest using historical market data.

The chart below compares the Federal Funds Effective Rate (in blue) with the Consumer Price Index (in red).

We’re taking the data all the way back to 1950.

You can see Druckenmiller’s point for yourself — at CPI readings higher than 5% (in red), the fed funds rate (in blue) has to be elevated above the CPI to tame inflation.

If history repeats itself, the fed funds rate will need to go a lot higher than the ballpark 3.5%, which is the level at which most analysts believe the Fed will stop hiking.

But the market is not pricing in a fed funds rate of, say, 5% or 6%.

If that is what ends up being required to stamp out this inflation, this bear market isn’t over.

***Second, let’s look at one of the reasons why our politicians and Fed members claim we’re not in a recession — labor market strength

At face value, this is true. The labor market remains strong, with unemployment down at 3.6%.

But for a different angle on this, let’s go to Jim Bianco.

Regular Digest readers will recognize Bianco’s name. He’s a widely respected market researcher who runs a macro analysis group that caters to institutional investors. We’ve highlighted his work several times here in the Digest.

From Bianco:

Powell said that we are not in a recession because the labor market is too strong.

This was exactly the same argument used by Arthur Burns 50 years ago.

But…all three of the 1970s recessions started with positive payroll growth.

After briefly comparing the labor force then to now, Bianco adds:

All those 1970s recessions started at the same level of job growth as today…

He then makes a point that’s parallel to the one we just made with Druckenmiller:

It is not about negative nominal growth. It is about not overtaking the inflation rate.

This was the story in of the 1970s, positive nominal growth could not overtake inflation. And it could be the story now as well.

Powell knows this but is spinning.

In a perfect world, supply chains will resolve, and it will have a wonderful disinflationary effect. As a result, inflation will organically fall back to the Goldilocks levels of 2%-3% without the Fed having to take rates above the inflation rate.

But if I’m a betting man, I’m not putting my money here…especially with Manchin and the government now looking to pump even more dollars into the economy.

***To be clear, I’m not denying the bullish momentum that’s taking shape today

It’s real, and despite some profit-taking on Monday as I write, it’s building.

What I’m wondering — what all of us should be wondering — is:

Is this the beginning of a new, sustained bull market? Or are we seeing a bullish shorter-term trading opportunity within a larger bear market that’s not quite ready to back into hibernation?

As has been the case for months now, the core issue that will push us one way or the other is inflation.

Keep your eyes on August 10’s CPI reading — what we learn that day won’t put this matter to rest, but it will get us one step closer.

Have a good evening,

Jeff Remsburg