Market Forecast For The Week of August 16, 2021

FORECAST: The S&P 500 rises further to hit 4490, buoyed by the double top in the $US, and corresponding double bottoms in the € and in WTI Oil. The $US fall last Friday means global growth is on track, constrained by the delta COVID wave but not felled. Global growth in turn powers US corporate earnings, which helps keep valuations high. The other key determinant of equity valuations is Federal Reserve liquidity, and while the bearish tone sounded by the recent concert of Fed officials indicates that easy liquidity has an expiration date, that date coincides with global victory over COVID (defined as overwhelming confidence in vaccination rates). There are no forecasts for herd immunity since new variants of COVID are likely while vaccination rates remain modest, but the coalesced opinion of healthcare forecasters and the market is that governments will eventually enact punitive laws & services firms demand vaccinations that force vaccine skeptics to choose intelligently. So real interest rates will remain low and that means investors are content to put marginal cash into US equities while maintaining their exposures to fixed income and commodities. Geopolitical stability is the foundation of equity bullishness and despite the humanitarian disaster unfolding in Afghanistan, the new world order of a rational and liberal US, a weak Europe and a confident China and Russia is bullish since at present Putin and Xi are both leveraged to global growth, so unlikely to make strategic moves that meaningfully hurt the US, Europe or Asia. That leaves only Kim Jong Un as a wildcard that could roil global confidence.

Wall Street analysts continue to raise profit estimates even after digesting all the 2nd quarter data from corporations, and this has led to higher valuations. This dynamic is likely to last since healthcare and policy experts believe COVID will be brought under control, creating a virtuous cycle where consumers maintain confidence, suppliers keep producing and keeping inflation low, and thus real interest rates remain low and justify high valuations.

The macro financial backdrop is risky but still bullish. 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. $US liquidity is abundant with no major regional shortages, and there has been no major chatter regarding concentration risk or counterparty risk at large financial institutions.

Last Friday I sold my position in Pfizer (PFE), so my current market positions are in Facebook (FB), Korn-Ferry (KFY), MKS Instruments (MKSI), Starbucks (SBUX), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).