Market Forecast For the Week of January 10, 2022: A Short Stretch Of Choppy Waters Before All Boats Power Forward

FORECAST: The S&P 500 consolidates this week as we head into earnings season and investors speculate how badly Omicron has affected fourth quarter sales and profits. By next week earnings reports come in full steam and and I expect the consolidation ends and resurgent confidence in the global consumer sends the market bounding back to new highs around 4840.

Driving earnings is stable if mediocre global growth, with the US & China at the upper end of slowing DM economies while emerging Asian nations like India and Vietnam surprisingly power forward with high-single digit expected growth. Despite the US slowing to its long-term growth rate of sub 2% and China sliding under 5% over the next two years, US multinationals continue to manage for efficient growth and consequently expected EPS growth for the top 100 firms in the S&P 500 in 2022 is now higher than at any point since summer, when delta first emerged.

Key to watch is whether the yield curve rises higher or steepens: I expect curve steepening that reflects a rise in real interest rates as both expected inflation and growth stabilize to long-term levels. This would keep the $US stable and that supports current investor sentiment as reflected in moderately rising commodity prices. But a level rise in interest rates would be unwelcome as it would push the $US considerably higher, dampening global growth more and setting off fears of a vicious cycle that redounds to the detriment of corporate profits. The breakout of the $US/KRW is troubling but also key to watch is whether the $US/MXP stabilizes.

Financial risk remains a concern but dollar shortages have eased. While China’s property crisis hasn’t triggered any fallout among global banks yet, cross-border bank claims to the non-financial private sector (e.g., real estate) are high according to the most recent BIS data. So the global financial markets need the Chinese Communist Party to finesse the troubles at Evergrande et al, which the CCP is incentivized to do since Chinese retail investors have money at stake. But overall the most recent BIS data shows a decrease in Q2 2021 of $308 billion (although due to comparisons with Q2 2020 it registered as a slight increase of 2% year on year), indicating contagion risk is now only a modest 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 there has been no major chatter regarding concentration risk or counterparty risk at large financial institutions.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), Titan Machinery (TITN) and a small net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).