Market Forecast For the Week of November 7, 2022: Seasonal Punch Spiced With Political Gridlock Gives The Bulls The Upper Hand

FORECAST: The S&P 500 consolidates in a wide range between 3650 and 3800 as investors debate whether stability in interest rates and the $US will leaven the global economy or plunge it into recession. Results from this week’s midterms and inflation reports won’t change that calculus and I expect the lack of meaningful newsflow to embolden the bulls to take over and send the market back to 3900 by early next week. But from there the bear market rally loses steam as the reality of negative corporate guidance, falling earnings estimates, persistent inflation and a dreary geopolitical landscape empower the bears to ride the market back down to the October lows.

Market technicals suggest the macroeconomic fundamentals are in a long bottoming phase driven by the Fed’s intractable opposition to current inflation. Markets typically discount bottoms a few months before they actually occur and I see the length of this process highly dependent on the action in currencies.  Key is whether € breaks above parity by Friday, as that would signal the reopening dynamic in Europe is strong enough to survive a cold winter and higher interest rates. Absent a move back to parity there is a strong likelihood is a retest of the September lows that would catalyze an ensuing decline in equities.

The European economy is vulnerable to the Fed’s action and unless one of the Governors publicly acknowledges the need to ease the QT schedule I don’t see the rate differential between US and Eurozone bond narrowing. The lower bound on the € depends on the width of that differential, as purchasing power parity can stay out of whack for long periods of time. The Fed is unlikely to give any such signals since consumer expectations of inflation stand at 5%, and that fact coupled with resilient spending translates into an inflation mindset that is precisely what the Fed wants to quell. European leaders can do little to offset the Fed since the conflicting political trends across Europe implies policy miscoordination and a difficult recession regardless of how cold the winter turns out to be.

Another key is the Chinese Yuan and its dependence on the zero-covid policy. Until a homemade mRNA vaccine is widely distributed on the mainland it’s unlikely Xi Jinping will broaden the use of imported vaccines or ease the zero-COVID policy and risk hundreds of thousands of premature deaths. The Yuan has found a temporary reprieve as the authorities pressure banks and dealers to sell $US, but the hardening of Xi’s power means capital flight will continue and push the Yuan lower until a real reason for optimism emerges. That pressures other currencies in the CFETS basket and lower currencies presage declining current accounts and declining global GDP. That can only spell lower lows for longer in equities, making the current rally another monstrous head fake driven by holiday cheer.

My current positions include a small cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETFs UPRO and SPXU, all of which nets out to a small long position in equities, which I expect to exit in the coming days.