Market Forecast For The Week of September 27, 2021

FORECAST: The S&P 500 trades within its mid-September range as interest rates tick higher and global growth estimates tick lower, keeping the market modestly off its all-time highs. Concurrent with the modest fall in economic indicators was a dip in Wall Street profit estimates last week, as declining estimates topped rising estimates among the 100 largest firms for the first time since October 2020. I expect the market to consolidate for the next few weeks until there is new information regarding vaccination rates in the US or the outcome of the Biden stimulus package/government funding/debt ceiling. Despite these uncertainties the market is unlikely to decline significantly since interest rates are moving up modestly and simply retracing early summer highs. And this is because inflation expectations remain anchored and that allows the Federal Reserve to keep liquidity flowing until its stated end date of mid-2022. While commodity prices have resumed rising (indicating the global growth slowdown is modest and temporary) that isn’t likely to fuel inflation as consumers across the world have become habituated to substituting in the traded goods and services sectors. Statistical methodology issues may push inflation temporarily higher to reflect housing price trends, but the reality is the price indices don’t handle quality changes or substitution changes well. This explains why market-based measures of future inflation are muted. Real interest rates will thus remain low and in the current context that is bullish for the intermediate term. Unless the news flow turns markedly negative the current consolidation will end in a few weeks and the bull run will resume.

With the economy slowing markedly from its 2020 recovery pace the fate of US political negotiations is all-important. When the country is in a crisis the key economic indicator is consumer sentiment, which either holds steady and foretells a recovery, or drops precipitously and foretells economic misery. In 2020 the indicator fell but stayed well above GFC levels, which was telling the markets that any stimulus plan would be effective. In late August the indicator dropped again to effectively “retest” its 2020 lows, but so far has held up while there are slight indicators the delta variant is coming under control. So if the Democrats can pass anything that is greater than trivial, the boost to the economy will re-ignite the bull market.

Besides newsflow re 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), Amgen (AMGN), Apple (AAPL), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).