Market Forecast For the Week of March 7, 2022: The Russian Bear Spreads To Western Europe And The S&P 500 Is Next

FORECAST: The S&P 500 falls to test its lows from late February as global investors move capital to the safety of US fixed income markets. Currencies around the world are falling against the $US and that ensures steeply declining global growth, with correspondingly lower equity prices down the road. I expect the S&P 500 to eventually fall to 3700 and present a major buying opportunity assuming no broadening or escalation of the Ukraine conflict. Further irrationality from Putin will mean an even deeper bear market, likely bottoming at 3200.

The €’s fall last week is indicative of the falloff in global growth that stems from the European economy. Higher energy and food prices raise inflation but adding to that is the incipient retrenchment of European banks, as their business and counterparties in Russia are decimated by Putin’s malevolence and the sanctions it evoked. The threat of future sanctions will persist until Putin is taken out by Russians, and that means self-sanctioning by banks and MNCs will throttle Russia’s money supply and its economy (in real terms, not inflation-based). Unlike the pandemic-induced global recession, there will not be no major fiscal stimulus to counter higher commodity prices, so global trade will be hurt by lower discretionary income across the world. Even if China comes to Russia’s rescue, which is unsure since China’s trust in Putin has diminished, the Chinese will extract a discount for Russian products to make up for the negative impact that global growth will have on Chinese exports. Putin is destined to destroy his economy and harm those of dependencies like India and some Eurasian economies (via remittances and trade) the longer he stays in power. In global financial terms that is hardly catastrophic, but the marginal fall in global growth means earnings estimates for US MNCs are bound to decline and that will pull down valuations from their historically high levels.

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 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.