Market Forecast For The Week of September 20, 2021

FORECAST: The S&P 500 correction extends to 4323 before halting, as macroeconomic consequences of the Chinese Communist Party (CCP) clampdown and stagnating vaccination rates in the USA temporarily tamp down enthusiasm. The US vaccination rate is stuck around 55% despite rising private sector requirements and Biden’s exhortations, while the ROW average is only 32%. Rationality and requirements will raise these rates and keep the economic boom going into next year, but fears of Chinese growth slowing on risk aversion due to China’s manhandling of the private sector is more intractable. Fitch recently lowered the 2021 global GDP forecast to 6% from 6.3% and made the same 0.3% adjustment to Chinese growth. While GDP growth is high by historical standards the market is correcting since valuations are priced for near-perfection.

Compounding fears is the $US rise against EM currencies and the €, which dampens receipts from global trade (since about half of international trade takes place in $US rather than the currencies of the actual exporters and importers). But these top-down considerations are inconsistent with bottoms-up expectations of EPS growth, which show that among the top 100 firms estimated growth next fiscal year continues to rise (currently > 7%). That impacts the top line of the fundamental financial models relied on by investors, while the denominator depends on interest rates. Last week saw a mild rise in the yield curve to early August levels, which indicates that despite announcements that Fed tapering is on the horizon the markets don’t anticipate a significant rise in interest rates. Yet more bullish is the decline in inflation expectations that accompanied Friday’s uptick in yields, signifying that the Fed has succeeded in keeping inflation in check and lowering unemployment, providing the goldilocks economy that investors have feasted on this past summer. So unless a major geopolitical event shocks the market (i.e., erratic behavior from Kim Jong Un), I expect the correction to be mild and bottom out shortly.

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.

My current market positions are in Activision (ATVI), American Express (AXP), Amgen (AMGN), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a short position in the SPX (UPRO and SPXU).