Market Forecast For the Week of October 24, 2022: The Fed Immunizes Itself From Midterm Myopia By Catalyzing A Pain Trade For The Bears

FORECAST: The S&P 500 rises in stairstep fashion to 4083 as the bears capitulate and bulls ride the weakening $US and declining treasury bond rates to fill the gap from early September. By next week the rally fizzles as interest rates find support levels and begin rising again, while fears of Fed hawkishness and financial contagion resurrect and send the index back to 4600. New lows ensue unless the midterms deliver a knockout punch for the GOP that brings the bulls back to the fight.

Bears like myself have bet on poor earnings guidance, high real and nominal interest rates, a strong $US and horrific geopolitical events to fell the markets and have been largely right, only to watch intermittent but monstrous bear market rallies emerge from nowhere. The current rally is no different as it was catalyzed by nuanced comments out of a few Fed Governors, orchestrated as much out of conviction as a desire to deflect political criticism. But the hope that the Fed will quickly ease rates once the economy re-enters recession in 2023 is a fairly tale wholly predicated on steeply declining inflation. What has changed over the past 6 months is not just the persistence of high inflation but the global consumer’s inflation mindset that overlooks rising prices in favor of “buy now, adjust later.” This logic persists since consumers benefit from buying early in an inflationary environment, but it also simultaneously girds the Fed to hold rates high until demand declines. The stagflation that ensues can’t form the basis for stable equity valuations since historically the downside risk from stagflation far exceeds the potential upside. Consequently lower lows are on the way, whether it’s elections or hawkish Fedspeak that catalyze them.

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 nets out to a meaningful short position in equities.