Market Forecast For The Week of September 7, 2021
FORECAST: The S&P 500 continues to make new marginal highs as investors perceive the slowing of the global economy as temporal and vigilance against COVID as permanent. Undergirding this bullishness is a stalwart Federal Reserve that has been pumping money into the economy out of an abundance of caution regarding the economic recovery: that caution was validated last week by the drop in consumer sentiment and deceleration in employment growth. Fed-injections of liquidity in the current context equates to putting funds into equities. The economic context is the proverbial goldilocks scenario for Wall Street, founded on profits, low inflation and modest geopolitical risk. US corporations remain efficient at wringing out profits in a slow growth world, and Wall Street analysts continue catching up to this reality and raising profit estimates, albeit at a decelerating pace. Helping this along is pricing power via a slight temporal surge in inflation, which investors perceive as non-threatening since global labor markets will remain elastic as automation keeps wages in check. Long-term inflation is not in the cards as the Amazon effect dominates retail sales: enormous online choice means consumers are incentivized to be vigilant regarding unreasonable price increases, and that keeps inflation limited to temporary supply shocks. Moderate inflation allows central banks to pump liquidity and keep real interest rates negative, which also keeps the $US from appreciating more, providing relief to key exporting nations and helping keep global growth from going negative. The only risks to bullish investor perceptions are plateauing vaccination rates, erratic behavior by Kim Jong Un or other terrorist actions, but until such news occurs the markets are following liquidity injections to marginally higher equity prices.
The steady climb in equity prices can also be undone by irrational exuberance or a decline in Wall Street profit estimates, neither of which looks likely. As of last Friday EPS growth among the largest 100 firms is forecasted at 22% this year and 7% in 2022, an uptick over the previous week, reflecting rising estimates rather than declines. And since the quality of these earnings are strong it’s unlikely corporations will start guiding lower unless the economy dips further. Since the equity markets are reflecting rational exuberance with steady moves higher instead of large and volatile moves, consumers and the corporate community are unlikely to be spooked by anything other than plateauing vaccination rates or a major geopolitical event.
Higher equity prices entail risk however, 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 added a position in American Express (AXP), and my other current market positions are in Johnson & Johnson (JNJ), Pfizer (PFE) and Starbucks (SBUX), and a short position in the SPX (UPRO and SPXU).