Market Forecast For The Week of November 1, 2021: 1980s Teflon Is Back And 1980s Volatility Will Soon Return As Well

FORECAST: The teflon market is set to make new highs early this week and then consolidate as corporate earnings enthusiasm battles higher interest rates and a middling long-term economic outlook. Liquidity from the Fed is driving the bulls but that will soon attenuate as tapering begins this month. Interest rates have risen and are now consolidating at recent high levels, while inflation expectations have returned to normal. I don’t see inflation dimming the bulls’ enthusiasm, but rather higher rates, dimming global growth and the geopolitical trend toward statism that will act together to negatively impact earnings. The market will make new highs this week but then consolidate as volatility leads to more rolling corrections.

Inflation is high now but the behavioral changes wrought since the rise of Amazon and the sharing economy mean competition is baked into global capitalism and will drive down prices once supply chains normalize. Low real interest rates are testament to the fact that inflation fears amount to fat tail risk rather than actual trends in the global economy. Rather it’s higher interest rates and China’s enforced slowdown that will cut global growth and constrain equities. And the inexorable rise of statism will bring the bears back and correct this market back to early summer levels. Statism is baked in all around the world, as profound environmental demands form an unholy polyamorous marriage with redistributionist ambitions, protectionism, immigration fatigue, identity politics and a cyber-fueled arms race. The end result is debt-fueled speculation with low productivity growth, a recipe for market volatility. Earnings estimates are starting to get volatile as it becomes clear firms can wring out efficiencies in every environment, but they cannot work miracles and make costs disappear. Volatility is likely to rise for these economic reasons and could rocket should any part of the fragile geopolitical equilibrium break (e.g., Kim Jong Un’s erraticism flares up again). The more the market rises as the year closes out the harder the correction will be, making for an exciting but futile round trip.

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 small net short position in S&P 500 (the levered inverse ETF SPXU).