Market Forecast For the Week of April 25, 2022: Falling Equity And Commodity Prices Are Short-Term Pain For Long-term Political Health
FORECAST: The S&P 500 falls to 4170 as a perfect economic storm gathers strength and points to recession across the world. I expect the market to duplicate its steep decline from last Friday but then consolidate towards the end of the week, as investors take heart from positive geopolitical results coming out of France and Ukraine. The jagged and volatile nature of this bear market will eventually find a bottom in the 3700 region, but I expect that to take weeks or even months to reach.
China’s economic decline is key to the war in Ukraine and the trend in global equity markets. As China declines so does the price of commodities, and in turn inflation. This eases monetary conditions and allows the European Central Bank to remain dovish and guide the economy to a shallow recession, freeing European leaders to focus on geopolitical issues, particularly maintaining unity vis-a-vis Russia. American military pundits see potential for Ukraine to not only win but even destroy the Russian army, profoundly changing the geopolitical calculus of every nation. It wouldn’t be the first time a smaller nation beat Russia, but the world-changing victories of Afghanistan and Japan against Russia in the 20th century would not compare to a victory for Ukraine this year or next.
Resetting the world to accept liberalism as economically and strategically superior to autocracy and statism would provide a backdrop for greater comity and prosperity. Unfortunately statism is on the rise and so a victory for Ukraine is critical, and this depends on China’s political situation as much as the incompetence of the Russian military. As Xi Jinping’s moronic COVID policies reduce economic growth to near-zero, his focus increasingly turns inward as he tries to seal his stature as the modern day Mao at the upcoming 20th Party Congress. That leaves Putin out in the cold with no economic or diplomatic safety valve as the Russian economy craters under sanctions and import bans, lowering popular confidence in Putin and further demoralizing the Russian army. Consequently China’s decline is the world’s gain.
The first signs of this uplifting scenario will take weeks to emerge and in this time equity markets will fall and backfill as the European and Chinese economies wane and financial risks accumulate with the volatility. Key to watch is the continued strength of the dollar and concomitant fall in oil. The farther both go the quicker will be the capitulation in equity markets. Both increase the potential for financial contagion, which is also 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 send equities careening.
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.