Market Forecast For The Week of September 13, 2021
FORECAST: Investors are spooked by last week’s rounding tops in the S&P 500 and NASDAQ and will sell off equities this week, resulting in a modest correction from the all-time highs of early September. I expect this decline to be modest since the fundamental economic and geopolitical context is positive for equities, offset only by uncertainty regarding COVID variants. Investor expectations for global GDP growth remain moderate as evidenced by the fall in the $US against the Chinese yuan and EM currencies like the Mexican Peso, and the action in commodities like Copper and Oil which have resumed their bull runs. Underpinning growth is central bank liquidity, which will be modestly tapered in the near future but not actually withdrawn. Government bonds reflect this modest tapering as the yield curve is fluctuating around its recent low levels, while inflation expectations remain constrained at the top end of the Fed’s desired level (i.e., 2%). This backdrop of modest growth and modest inflation is fine for US firms, since they operate on a mantra of competing to adopt best practices and are thus practiced in squeezing profits from modest economic growth. This in turn supports the long-term confidence of investors in the US, with the only uncertainties being COVID or erratic behavior by Kim Jong Un. The moves by governments to pressure citizens to get vaccinated and over-vaccinated likely suppresses COVID in the winter, while KJU is showing signs of desiring progress. These residual uncertainties cap the velocity of the bull market but not underlying bullish confidence. Consequently the correction under way will be modest rather than disruptive.
The risk of a deeper correction is high enough to closely watch the action in currencies and commodities this week to see if they amplify a risk-off mood or not. Besides COVID variants and KJU’s erraticism, the major macroeconomic risk is the high level of cross-border bank claims (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 Starbucks (SBUX) and added a position in Amgen (AMGN), My other current market positions are in Activision (ATVI), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a short position in the SPX (UPRO and SPXU).