Market Forecast For the Week of October 10, 2022: The Fed Silently Fires Its Own Shots Into The Culture Wars, Leaving The Bulls Perplexed And The Shorts Salivating

FORECAST: The S&P 500 falls to 3560 as interest rates break above their September highs and pull money from volatile equity markets into higher-yielding cash accounts. A counterrally follows as the shorts take profits ahead of uncertain earnings reports from major banks late in the week. The bulls hope these reports reveal healthy loan demand and a soft landing in the works, but as the S&P tracks back to 3700 yet another shorting opportunity blossoms as negative guidance thwarts all but the most delusional bulls and sends the market to lower lows.

Rising rates are the bête noire of the bulls as they seemingly ignore market-based expectations of future inflation, which rest well under 2.50% over the next ten years. The bulls see perversity in Fed intentions to keep raising rates and crimping liquidity but obtusely ignore the sociopolitical reality confronting the Governors. Educated on standard economic theory the Governors witness low labor force participation and rising wage demands and deduce limited supply and persistent demand will yield unacceptably smaller profit margins. Their hawkishess reflects pro-capitalist ideology and cultural belief more than the crosscurrents of economic data, and last week’s chorus of liberal and conservative Fed voices leaves no doubt that only a Lehman moment can change their intentions to lower demand in order to tame the refractory American worker.

Earnings reports coming in next week will reflect those higher rates in the form of negative FOREX translation effects and decreasing visibility of revenues as consumers pull spending to deal with high debt payments, rents, gasoline and food prices. Only a positive change in earnings quality can put an early end to the bear market, and the news out of key consumer names like Nike suggest that turn is still months away. In the meantime all currencies great and small will continue falling as interest rate differentials and horrid geopolitical uncertainty push global Wall Street into the comforting vault of cash accounts denominated in $US.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which still nets out to a meaningful short position in equities.