Market Forecast For the Week of May 31, 2022: The Bulls Take Premature Control While COVID Snakes Through China

FORECAST: The S&P 500 continues its uptrend from the lows set on May 19, which some have characterized as the bottom of the 2022 bear market. I disagree and see the current uptrend as dissipating around S&P 4300, at which point we begin the last leg the bear market that takes us to 3700 and a true bottom (assuming no further geopolitical shocks).

The catalyst for the current rally is corresponding rallies in the bond market and foreign currencies against the $US. Both are set to reverse course in June as global investors come to terms with the Chinese lockdown and its impact on global growth. To date the Chinese Communist Party hasn’t taken steps to replace its disastrous zero-COVID strategy with the mRNA vaccines that the Western world is largely using to cope with COVID. Consequently even as curbs are slowly lifted in Shanghai and Beijing the balance of business can’t be conducted normally since complex supply chains and worker access to basic food, shelter and transportation won’t resume normalcy anytime soon. The CCP is effectively punishing its citizens while its homegrown pharma industry tries catching up with America and Europe. Insidious COVID variants are highly likely to outpace the best efforts of Chinese pharma, denting confidence and and the Chinese economic recovery, such that it is.

With China effectively operating in recession the ripples through the global economy will slowly multiply and cause a recession in corporate profits. 2022 full year earnings estimates for the top 100 firms in the S&P 500 have steadily declined, now standing at just 3.6%, compared with 7.3% a month ago and 9.9% in late March. Even more profoundly, estimates for 2023 haven’t risen, so the drop in 2022 profit growth represents a permanent loss. That and the emerging losses from food price inflation, shortages and dramatic weather changes have yet to be full factored in by the bulls. Consequently I see lower lows ahead, and a bottom in June assuming other geopolitical risks don’t materialize.

Unfortunately geopolitical risks are exacerbated by significant financial sector risks. 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. 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.