Market Forecast For the Week of December 20, 2021: Another Mild Correction Til Year-End, But Not A Brick In the Wall Of Worry That The Bulls Will Eventually Scale

FORECAST: The S&P 500 falls to 4500 as traders react to the double top made last Thursday and use Omicron and other geopolitical issues as an excuse to take profits. While the issues are real the likelihood of global growth slowing further is small and the current selloff will provide a buying opportunity as with each selloff since March 23, 2020.

Key to investor sentiment is inflation, since this drives Central Bank interest rates and thus valuations of high flying stocks like Apple (AAPL). Inflation expectations are likely to hold steady here as the major disinflationary trends are still in place due to the generally centrist policies of Biden, Xi Jinping and most European nations. But fears of a leftward tilt among these leaders is an excuse to take profits now. The election result in normally centrist and business-friendly Chile is buoying this short-term pessimism.

Global growth is at risk due to vaccine hesitancy and poor rollouts, while structural reforms are being halted by the mild leftward tilt in key nations. But as Omicron leads to shutdowns and restrictions vaccine hesitancy will be partly cured, while voters in the US are likely to repudiate the democrats and thus force Biden to revert to his normal centrist instincts. Expectations of US multinational EPS growth has only gotten stronger since the Autumn, and that fundamental fact will buoy the bulls to take back the market in the New Year, assuming no major geopolitical implosion occurs.

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), Titan Machinery (TITN) and a small net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).