Market Forecast For the Week of March 28, 2022: The Fed Is Taking Away The Punch Bowl Just When A Long War Has Begun

FORECAST: The S&P 500 continues its relief rally to 4600 before petering out as it fails to break above the highs set in February. From there expect the market to begin a new descent toward lower lows as high interest rates marry uncomfortably with the prospect of a long proxy war with Russia in Ukraine.

President Biden’s speech noted the war would last a long time and have devastating consequences, then ad-libbed that Putin must go. The last statement can be interpreted as a sign to Putin’s inner circle that now is the time to act, or it might simply have reflected Biden’s exhaustion with the calamity occurring on his watch. Puncturing the gullibility of the Russian people and pusillanimity of Putin’s inner circle may require yet more heroism from the Ukrainian resistance, and during this time we can expect food price inflation and shortages. Consequently inflation won’t come down fast enough for the Fed, who are set to raise rates by 50bps in May, with negative attendant impact on borrowing costs.

The rise in interest rates makes equity valuations harder to stomach in light of declining earnings estimates, consequently I expect equities to fall as we being April. Key to watch is the $US, which is in a clear uptrend against most major and EM currencies, and bodes ill for global growth. As we approach earnings season in mid-April investors will begin discounting lower global growth and correspondingly negative guidance from MNCs, catalyzing more estimate revisions and declines in the major equity indices.

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.