Market Forecast For the Week of January 3, 2022: The Song Remains The Same, As Long as Politicians And Central Bankers Don’t Add Their Voices
FORECAST: The S&P 500 rises to new highs around 4840, fueled by the happy fraternal twins of muted interest rates and robust profit growth. As long as political and central bank leaders refrain from crashing the party the prospect of a good earnings season will keep the bulls in charge, with new highs followed by the oft-repeated pattern of consolidation and further new highs.
Despite Fed tapering liquidity still remains a net positive and this is keeping both short and long US interest rates within a trading range, while low global rates tether those rates below long-term inflation expectations. And despite Omicron and weather disruptions Wall Street analysts still expect earnings to grow by 8% in 2022 after 20% + growth in 2021. Easy money from the Fed helps drive earnings and will continue but at a restrained pace, and that suits markets because inflation is expected to decline markedly over the next 5 years and the Fed has signaled they will be watching intently to ensure that happens. Corporate efficiencies combined with disinflation and low interest rates make equities the preferred asset, so even at a forward PE multiple of 21 the bulls are firmly in charge.
Other asset classes are trading consistent with this favorable macroeconomic forecast but not a such a strong pace that puts earnings at risk or draws interest away from equities. The modest bull market in copper signals that EV demand and modest global growth outweigh the negative risks in China occasioned by Xi Jingping’s leftward tilt. The resurgence in gold also points to modest global growth supported by a declining $US, as currencies like the €, Chinese Yuan, the Mexican Peso and Indian Rupee look set to strengthen. Key to watch is whether Omicron continues to be a weak variant and gets some nations closer to herd immunity, and whether geopolitical risks from Eurasia threaten to pull the $US back up.
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).