Market Forecast For The Week of October 18, 2021

FORECAST: The S&P 500 continues to consolidate off its early September highs as rising interest rates sap the bulls’ strength coming off last week. The US yield curve is steepening as inflation worries persist despite the Fed’s assurances and the disinflationary trends of the past 20 years. Global growth remains on track for modest but consistent growth, evidenced by the strong rise in Copper and oil. Gold is also strong but likely to consolidate rather than rise further as I see inflation and stagflationary fears as irrational. While the $US is strengthening against the Yen it’s weakening across major EM currencies, another sign that most of the world is set for growth, not stagflation. Growth powers US firms’ profits and given the continued positive trends in estimates among Wall Street analysts the level of profit growth signifies that market is not overvalued but rather fairly valued. That spells consolidation rather than a major move in either direction.

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), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).