Market Forecast For The Week of August 30, 2021
FORECAST: The S&P 500 makes a marginal new high in the 5520 region then corrects back to the lows of last week. Bullishness rules all over the world this morning but I expect this to change in short order as fears of delta COVID overtaking recovery momentum will be augmented by concerns over Biden’s diminished prestige due to the worst-case scenario playing out in Kabul last week. When economic and geopolitical signals are mixed the markets typically rise and then correct in a tight trading range and that is what I expect for the next few weeks. What is clear is fear of global growth slowing is driving the currency markets. The $US had a modest fall last week but this is set to be reversed as the €, Yen, Chinese Yuan and major EM currencies didn’t break out meaningfully. Similarly in the commodity markets the action is mixed, implying global growth is no longer robust and specific supply-demand factors are playing out in individual markets. Causing further uneasiness is US inflation expectations which rose on Friday and are threatening to eclipse the summer range that had been a source of comfort to the equity markets. Bullishness starting this week will convert to mild bearishness by the end of the week.
A market correction by end of week will be a buying opportunity, regardless of whether it’s shallow or deep, because the negative economic and geopolitical concerns outlined above aren’t decisive for long-term US corporate profits. Estimates of profit growth continue to rise even though most firms have already issued their 2nd quarter results and guided for the future. This bullishness from Wall Street is substantiated by the strong quality of 2nd quarter earnings, where my survey of the 100 largest firms showed that high quality earnings trumped low quality by more than 3-to-1. High quality of earnings typically presages good times ahead. Despite high COVID rates, persistent vaccine hesitation around the world, and the Afghanistan tragedy, the odds still favor modest growth around the world, which is enough to power US corporate profits. Fueling this modest global growth is central bank liquidity, which will continue even when tapering of asset purchases begins. Easy liquidity is keeping interest rates low and buffeting high equity valuations in turn. The US yield curve rose modestly last week but by Friday had already begun a reversal: in the current unusual context, continued low nominal and real interest rates power not just corporate profits but demand for equity ownership. Only a dramatic change in the labor market, a reversal in the Biden economic agenda or a catastrophic geopolitical event can change the overall profit picture. Consequently the upcoming market correction will be yet another buying opportunity.
Buying the dip will be rewarding because it comes with risks: interconnectivity among global banks is a major risk since 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 $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.
On Friday I sold my position in MKS Instruments (MKSI) and initiated new positions in K-Force (KFRC) and in Pfizer (PFE). My other current market positions are in Facebook (FB), and Starbucks (SBUX), and a short position in the SPX (UPRO and SPXU).