Market Forecast For the Week of March 14, 2022: The Bulls Will Strike Out This Month On Nasty Pitches From The Fed, Putin & Corporate America

FORECAST: The S&P 500 declines modestly to the 4150 level and consolidates for the remainder of the week, setting up for big moves next week when the Fed meets. A deep selloff crashing through 4000 will come courtesy of the unhappy cohabitation of quantitative normalization, geopolitical horrors and high valuations. Just as consumer confidence continues to edge lower so too is global investor confidence, setting the S&P 500 for a second bear market in as many years.

Putin’s destruction of Ukraine shows few signs of boomeranging into a palace coup, and that means trouble for markets going forward. Persistent strains on commodities and fears of escalation or nuclear war are weighing on margins and emotions throughout corporate America. Firms have seen earnings estimates decline as a result of the war’s impact on rising commodity prices and lower global growth, and with earnings season starting in about 5 weeks, Wall Street Analysts are bound to further revise their estimates lower. That uncertainty alone will give the bears confidence to send the market lower.

The bulls can still point to low interest rates, but the Fed is now shifting from quantitative easing to eventual tightening, so interest rates are less in focus than liquidity. Uncertainty abounds concerning the liquidity gap that begins this month as the Fed works out how to drain funds out of the capital markets. Consequently the yield curve is steepening with higher rates on the long end and the consequent bearish impact on market valuation models. Further constraining earnings is the strength in the $US, coming at the expense of the € and Chinese Yuan and even the ¥, reflecting lower Asian growth as Xi Jinping becomes embroiled in the Ukraine disaster when he already has enough economic concerns on his plate. The continued bull market is commodities is a testament to the Russian presence in global supply chains, as this more than offsets $US strength.

Financial risk is a significant concern as dollar shortages may emerge due to sanctions on Russia’s Central Bank and several commercial banks. And 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. Talk of financial contagion is enough to thwart global investor confidence. And 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.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.