Market Forecast For the Week of December 6, 2021: TINA Fails To Draw Out The Market’s Inner Exuberance

FORECAST: The S&P 500 rises briefly then resumes its downtrend and consolidates around 4440 by close of the week. Fears of a rate hike cycle beginning soon will make equity investors skittish about holding long duration assets while geopolitical tensions pile on the growing doubts about 2022.

Bonds are correcting due to Fed capitulation on inflation, as the Omicron variant is expected to elongate the current supply chain disruptions and supposedly condition consumers to accept higher inflation for longer. But this is unlikely as consumer behavior and retail behavior have changed, making retail goods inflation a transitory phenomenon. Inflation likely settles in the high 2% area, which is higher than in the past few years but salutary for the economy. Housing or rental inflation isn’t likely to decline assuming household formation trends remain as forecasted, and this will offset eventual retail disinflation. Healthcare inflation is also likely to be robust given the pandemic, while transportation inflation will be strong given the desire of the Left to tax fuel combined with the limited spare capacity for some fossil fuels like oil. But the balance of inflation components (e.g., food, recreation and other goods and services) are half of inflation and these will likely come down hard as the labor market is not set for long-term growth, but instead will be pressured from digitization and automation. The success of China’s pivot to capitalism means other EM nations are slowly taking over the lower end of supply and keeping prices low. US firms are still expected to generate 8% profits next year and that means valuations are simply high, not indefensible. Liquidity is still abundant in the system due to central banks QE, but it’s stratified with bond markets suffering from limited participation.

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 the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).