Market Forecast For the Week of November 29, 2021: TINA And FOMO Step Out And Send The Markets Temporarily Higher

FORECAST: The S&P 500 rises and claws back much of its losses from last week and consolidates around 4700. The fears of Omicron COVID evading vaccines is overdone as another few weeks of data is required to confirm that, and so far African officials are suggesting the vaccines work as expected. Given earnings strength and possibility that inflation has peaked, this is enough to move markets to consolidate and get close to the highs reached before Thanksgiving, after which I expect a real correction to set in through December.

The US equity markets are fixated on COVID, earnings and inflation, which until Friday were all trending bullishly even though Europe and much of Asia were experiencing setbacks. I expect a knee-jerk reaction to Friday’s brutal selloff to send the markets back to 4700 but that will prove just a temporary bounce as a correction sets in during December. The key metric the market is neglecting is consumer confidence, which is breaking down for various economic and political reasons. While Omicron is likely not a new crisis, it does point to the ability of viruses to mutate quickly, and as long as 40% of the American population remains obdurate and unvaccinated, that means the mutations will continue and stymie the US economy. When the markets begin rationalizing the drop in consumer confidence a correction will set in since valuations are too high for a world dealing with so many problems.

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 to the non-financial private sector (e.g., real estate) are high according to the most recent BIS data. So the global financial markets need the Chinese Communist Party to finesse the troubles at Evergrande et al, which the CCP is incentivized to do since Chinese retail investors have money at stake. But overall the most recent BIS data shows a decrease in Q2 2021 of $308 billion (although due to comparisons with Q2 2020 it registered as a slight increase of 2% year on year), indicating contagion risk is now only a modest 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), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), and a small net long position in S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).