Market Forecast For the Week of January 18, 2022: Robust Earnings And CorporateSpeak Come To Rescue The Bulls

FORECAST: The S&P 500 rises back to last week’s highs around 4750 by the latter the part of the week as the consolidation continues with rising volatility. As earnings season gets underway what investors want to see is positive corporate guidance on margins, since global growth expectations have dimmed while labor markets have gotten tight. Assuming firms continue to speak with guarded optimism the market will trace its way back to marginal new highs by month end.

The relentless drive toward corporate efficiency and the twin goal of heading off the latest disruption by nimble small firms and upstart Asian firms is the substance of the bullish argument, since valuations are historically high and Federal Reserve liquidity is in its last innings. QE is ending in March and the Fed Funds interest rate is set to rise concurrently, which means QT (i.e., balance sheet reduction) will start sometime in late 2022 or early 2023. The Fed isn’t taking the punch bowl away but simply normalizing, and for the bulls to feel similarly normal they need corporations to provide optimistic guidance re margins. IF that happens then new highs are nearly certain since the solid uptrends in commodities and the modest weakness in the $US against both majors and EM currencies reveal that global growth expectations remain positive. The rise in the US yield curve reflects both stable growth expectations and moderate inflation, as real interest rates climb back to zero. Inflation at 2% and real interest rates at 0 are an elixir for TINA, which is why the bulls will gain the upper hand by the end of the week. The only grave threat to global growth is China making a major policy mistake in its COVID policy, as I discussed last week. Assuming the Chinese pivot and discard their zero-COVID policy as the Winter Olympics approach, investors will be shorn of one more risk factor and will take the markets to marginal new highs.

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), Starbucks (SBUX), Titan Machinery (TITN) and a long position in the S&P 500 (via the levered ETF UPRO).