Market Forecast For the Week of April 18, 2022: Purgatory Inches Closer As World Leaders Send All The Wrong Signals
FORECAST: The S&P 500 breaks lower to 4300 as the bears feast on bad news from China, Ukraine and growing cohort of large and small nations. I expect the markets to swoon early but then consolidate by the end of the week as the bears take profits, a short break before heading much lower as 1st quarter earnings season comes to a close.
Unsuitable policies on both the geopolitical and economic fronts are slowly eroding confidence the growth slowdown will level off and allow firms to earn profits at a double-digit pace next year. Earnings estimates for the top 100 firms in the S&P 500 have barely declined in the face of a shocking bear flattening of the yield curve and strengthening $US. Those estimates have much further downside as China’s moronic COVID policies puncture firms that rely on Asian revenues while the Fed’s hawkishness saps consumer confidence in the US. No region offers positive trends as commodity inflation and a strong $US deflate the terms of trade for all the but the most self-sufficient nations. Declining global trade will pile onto declining growth resulting from the fall off in stimulus as most of the world exits the pandemic. This economic vicious cycle mirrors the dynamic in Ukraine, where Biden’s caution allows Putin to stay in power and every incremental sanction and weapons provision ups his resolve to hammer Ukraine with increasing brutality. The result is geopolitical and economic purgatory as we await signals of global stagflation.
Poor decisions tend to compound and this portends rising fear over the long-term health of the global order. The rise of the far right in Europe is accelerating statism and this can only erode business confidence in a region already reeling from Putin’s malevolence. Pakistan’s fall into political and economic purgatory bodes ill for all of central Asia as right-wing leaders dismantle political freedom with impunity and in many cases with popular support. Globalization, digitization and automation remain as key themes for MNCs, but the risks of cascading decoupling of the West from Eurasia are now too large to keep confidence high enough to support current valuations.
As estimates decline further the markets must also decline just to keep valuations level, and I expect a typical overshooting as investors let fear overtake them and pull valuations down to normal historical levels. 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.