Market Forecast For the Week of February 22, 2022: After This Week, The Surge

FORECAST: The S&P 500 tests the 4250 level and then consolidates before turning up next week in a gradual surge move back to old highs. The bottom of the tortuous 2-month correction that began in the New Year is finally coming to an end as the Fed has learned its lesson and will hold off any further talk of a 50bp rise in the Fed Funds rate at its mid-March meeting.

Several Fed speakers come to bat this week and mild risk-off sentiment will pervade until these speakers make clear the Fed hasn’t lost its senses regarding COVID-related inflation.  Last week saw a noticeable lack of talk regarding a 50bps rate hike (other than from uber-hawk Bullard), and I expect Fed officials to continue that line because of the trend in inflation expectations. These market-based predictions of future inflation show a precipitous decline over the next few years and a normal 2-2.5% inflation rate over the next ten years. While bond market volatility is high by historical standards and rising since October, the drop in inflation expectations just as nominal rates have been rising suggests the markets are reacting to Fed policy rather than signaling a change in underlying economic trends. Powell and the inflation doves are likely to take this reasoning and persuade the hawks that a 50bps hike is not only spectacularly unusual (as a starting move) but also clearly dangerous. Global growth is at stake and the rise in nominal rates in Europe and China along with the bullish trading in commodities and a mixed $US reveal that growth is robust and will persist as long as the Fed doesn’t raise rates too much.

And as long as Putin and Biden continue the charade of averting a phony war in Ukraine the market is set to rise on the back of global growth that powers high single-digit profit growth in both 2022 and 2023 among the 100 leading companies in the S&P 500 . Cyber threats will continue to generate headlines that move overnight and morning trading, but the overall trend ignores the conflict since Putin has no incentive to escalate tensions and endure deeper and more targeted sanctions from the West. Should China change its tack regarding COVID and Europe successfully ease COVID restrictions then there is even more upside to this bullish but conservative corporate guidance.

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.