Market Forecast For the Week of May 2, 2022: Insecurity And Malevolence At The Highest Echelons Are Driving A Comeuppance In Global Equity Markets

FORECAST: The S&P 500 continues its decline and settles at 4060 before consolidating the huge losses taken since the end of March. Falling global growth takes the blame for the drop in valuations, driven by a relentless push by American, Russian and Chinese leaders to inflict misguided and malevolent policies on the world.

The strength of the $US driven by the relentless rise in US interest rates combines with Russia’s horrific war against Ukraine and China’s moronic COVID policies to create the perfect storm for the global economy, raining down on the long-awaited return to economic and social normalcy. The Fed’s policies are understandable given its historic role of acting solely on the basis of US interests. When inflation is high the Fed is expected to clamp down and force adjustments by the private sector and fiscal authorities, regardless of whether such adjustments are likely or the global effect of higher interest rates. Fixed income and derivatives markets expect the Fed to hike rates by 50bps this week and the same at its next few meetings, blithely ignoring the strengthening $US and its amplification of commodity shortages and trade disruptions. Inflation expectations remains tethered to the 2.5% level for the foreseeable future, yet the Fed ignores this too. Economic logic suggests American workers will return to seeking work now that inflation has eroded whatever remains of stimulus payments, dampening wage growth and setting in motion the dramatic disinflation the TIPs market expect. Yet the Fed ignores this too as it would rather be seen as doing something than doing what is sensible. At heart is the fundamental insecurity of Fed Governors in promoting bull markets with easy money, and the consequent impact on the economic and social divide in America.

The drop in copper despite Russian export disruptions is a strong signal global growth expectations are declining. Equity markets are starting to price that into earnings estimates, which have declined markedly in the past two weeks. This will only continue as misguided policies pile atop each other and force growth down to near zero. Another 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.

Wild commodity swings 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.

On Friday I sold my offsetting position in the inverse levered ETF SPXU, which restores my exposure to the S&P 500 via the levered ETF UPRO. Consequently 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.