Market Forecast For The Week of October 11, 2021

FORECAST: The S&P continues to consolidate by heading lower and testing last week’s lows around 4278. The current downturn is being driven by rising interest rates, but I expect the bond market to reverse course by next week and reset the equity markets accordingly. Bonds are testing earlier summer lows as inflation fears rise, and that is pulling the $US higher as well. Inflation expectations are key for the bull market and as of Friday they were testing the top of the range of the previous 8 years. I don’t expect them to break beyond 2.50% and that is key to settling the market, as low interest rates are just as important to equities as liquidity injections from central banks. The fact that Fed tapering will be slow is another factor in the bulls’ favor, as liquidity will continue to pour into the markets until next summer at the earliest.

And during this period EPS growth is expected to be around 22% for the top 100 firms in the S&P 500, which makes current valuations reasonable. Importantly these estimates are rising even as we head into 3q reporting season and economic news has turned down. After next year EPS growth is still expected to be around 7% in 2023, much higher than expected nominal GDP growth. Analysts are bullish because of numerous factors but chief among them digitization and automation, which help profit margins and force the American worker to be dynamic. Already there is emerging evidence The Great Resignation is coming to an end and that moderate democrats are unwilling to let Biden and the progressives dramatically rewrite the labor market. While the charts look bearish the likelihood is that global growth remains on target and US firms wring out profits, taking advantage of a transient blip in inflation to exert some pricing power. The fundamentals of the global economy remain positive on net, evidenced both by surging oil prices and steady prices across the broader commodity complex. Barring an unforeseen geopolitical event (e.g., a shock from North Korea) expect the current consolidation to end this week.

Financial risk remains a concern but dollar shortages have eased. While China’s property crisis hasn’t triggered any fallout among global banks yet, cross-border bank claims are high (the most recent BIS data shows an increase in Q1 2021 of $646 billion, partly due to seasonal factors but still high, although due to comparisons with Q2 2020 it registered as a slight decline of -0.6% year on year), indicating contagion risk is a concern. EM debt repayment remains murky for badly run nations (e.g., Turkey, Argentina) but moderate global growth is buoying export confidence in major EMs. Fortunately there has been no major chatter regarding concentration risk or counterparty risk at large financial institutions.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).