Market Forecast For the Week of March 21, 2022: The Relief Rally Ends Shortly As Harsh Geopolitical And Macroeconomic Trends Enervate The Bulls

FORECAST: The S&P 500 continues last week’s rally towards 4550 and consolidates its gains through to week end. A major move down begins next week as growth fears and declining earnings estimates drain confidence while fears of escalating war in Europe titillate the bears to massively short equities. I expect new lows with the S&P testing the 4000 level by month-end, but even deeper lows in April assuming the war escalates as I expect it to do.

Global investors are banking on modest escalation if any at all, as a new status quo is said to be emerging and peak uncertainty behind us. I see this as fanciful given that Russia’s army and intelligence agencies see an endgame in their favor, and are consequently standing by their clearly erratic and misguided leader. The endgame involves escalation where Russia tries felling Ukraine with uninhibited destruction, and seeing this fail early on, threatens other Eastern European countries with nuclear weapons. The West is already fighting a proxy war and will be drawn into making an existential decision. Only at that point can I expect Putin’s inner circle to arrest him and negotiate a settlement. Only at that point will peak uncertainty be behind us.

For now however global investors are climbing a wall of worry that discounts slowing global growth and the unholy combination of Fed hawkishness and supply shocks emanating from the commodities markets. Fed haws like Bullard would rather risk sending the globe into recession than being branded doves on inflation, somehow believing such a stance will instill confidence in business, workers and the markets. But inflation expectations remain anchored below 3%, and real wages have declined so severely that acceptance of further price rises is unlikely. The underlying disinflationary trends remain resilient, from online competitive retailing to digitization to automation. Despite market indicators pointing to modest inflation the Fed talks a tough game and the prospect of an overly aggressive Fed alone will pull this market to new lows, regardless of the outcome in Ukraine.

Key to watch is resumption in the strength of the $US, particularly against EM currencies. The South Korean Won and Mexican peso have reversed their downtrends and broken out, but not so other key currencies. The Pakistani rupee is at new lows, the Turkish Lira remains weak & the Indian rupee’s rally has stalled despite a steep decline in oil prices. The volatility of high oil prices and Russian supply explains much of these trends, but if the war escalates as I expect, these currencies will suffer their old lows again. That will be a sign global growth is at meaningful risk, and send equities lower even if somehow Ukraine prevails against its malevolent brethren.

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.