Market Forecast For the Week of February 14, 2022: Still Waiting For The Final Deluge That Gives Risk-Amenable Investors A Golden Buying Opportunity

FORECAST: The S&P 500 consolidates early on this week before heading lower to test 4300 again. Russia-Ukraine tensions are largely irrelevant as the flow of headlines cause nothing more than small temporary spikes, while the real reason for the overall downward trend is continued worries over economic policy mistakes by the US Federal Reserve and the Chinese Communist Party. Following the downmove I expect more consolidation before a washout that leads the S&P to make new a new bottom in the 4200 region, providing investors with a significant buying opportunity as the markets eventually return to old highs by Spring.

Last week’s surprise inflation and consumer confidence data have given the Fed a no-win situation that leads global investors to downgrade equities. Clearly the economy will slow due to consumers pulling back from high prices and consequently the Fed should be raising rates mildly to reflect a neutral stance on the economy. But inflationistas from the right and left are forcing Fed governors to publicly respond with hawkish comments that lead short and long rates to rise and the $US to move higher, causing worries over global growth, equity valuations and MNC profits. I see the Fed acting less hawkishly than markets anticipate, setting the stage later this winter for an equity rally back to old highs around 4800. Any move to the 4200 region will provide a short-term buying opportunity that could coincide with a market bottom should geopolitical developments turn positive simultaneously.

The CCP is unlikely to continue a nonsensical COVID policy and this could prove the event that changes investor perceptions. And should NATO members hold firm and work out Europe’s near-term energy needs that may also spur markets as it would show Putin overreaching and hurting Russia’s one-dimensional export economy to the benefit of global consumers.

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 aggregate cross-border bank claims are rising at a modest 3% clip (based on increase in Q3 2021 of $228 billion), indicating contagion risk remains 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 positions include a sizable cash position, Amgen (AMGN), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.