Market Forecast For the Week of April 11, 2022: A Tight Trading Range As Global Investors Assess Profiles In Pusillanimity

FORECAST: The S&P 500 consolidates between 4400-4600 as global investors wait to see if Biden pushes back further on Putin & how China reacts to its domestic health & property problems. I continue to expect the ultimate resolution to be rising fear that global growth is in jeopardy as world leaders make horrific errors of judgment, dampening confidence the old world order will resume any time soon.

Biden’s strategy is to do the minimum to maintain Ukraine and constrain Russia, hoping that US equity markets appreciate this caution and remain close to all-time highs. This supposedly ramifies into robust consumer spending & business optimism and persistent growth in the US economy. But global stagflation is now a real possibility precisely because of US sanctions on Russia. Too many commodities are produced by Russia & Ukraine and too few countries are as resource-rich as the US, driving currencies lower and pinching consumers across the globe. Declining global growth in turn hurts US exports, at the very time inflation is raging because of COVID-related bottlenecks and the long-term consequences of leftist anti-oil policies. The unusual marriage between the strong $US and high commodity prices points to the stagflationary impact of the Ukraine war, where supply deficits reduce growth & raise prices, leaving nations that lack the self-sufficiency of the US in economic purgatory. Since US consumer confidence is already breaking down the knock-on effects of falling global growth will pull the US down as well, making Biden’s strategy the geopolitical equivalent of pennywise and pound foolish.

If Biden’s gamble on doing the minimum rather than maximum fails on the battlefield as well, then stagflation will persist for another year or more, wrecking equity markets. The polls that Putin is reading are likely motivating him to launch big offensives in Ukraine, making failure a stronger possibility. And as long as Germany continues to act as immorally as poor benighted countries like India Putin has the means to make his gambit work. Key will be whether China continues to offer lukewarm support as this tacitly allows Putin to believe he can win both the geopolitical and economic war against him. Given the terrible consequences of his COVID and financial policies Xi Jinping is likely to minimally support Putin as he can’t afford to distract himself from his own problems. The result will be Putin inflicting this malevolence on Ukraine, Chinese growth declining and stagflation lasting longer across the world, unless Biden and Olaf Scholz takes the Russian bear by its neck.

And compounding these egregious policies by world leaders is the likelihood of a mistake at the Fed. Rising but flattening yield curves despite a numerous anti-inflation signals (e.g., a strong $US, moderate inflation expectations in the medium and long-term, and static gold prices) indicate the market fears a policy error at the Fed. I see this as one too many bricks in the wall of worry the market has been scaling since February 24. Financial contagion risk is also 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.

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.