Market Forecast For the Week of May 2, 2022: Everyone Now Knows The Bad News, And That Means Consolidation Will Come Before The Big Meltdown
FORECAST: The S&P 500 consolidates around its recent lows of 4060 and then rallies as the bulls reemerge armed with the certainty that the next Fed rate hike is over a month away and earnings reports nearly 3 months away. I expect this reprieve to gird the bulls for a few days until more bad news out of China combines with relentlessly rising interest rates to put the bears back in charge and send the S&P to a 10% meltdown at 3700.
An initial move down this morning followed by a rally back to 4300 will likely cap the bulls’ best efforts, as earnings estimates continue to decline and now put 2022 growth at just 6.5% for the top 100 firms. That’s nearly one percentage point below levels a week ago, and 2.5 points below a month ago. The bulls can only point to nominal GDP growth driven by inflation as reason to believe corporate profits will hold up, ignoring the fact that declining productivity, a declining work ethic and surging trade deficits are all negatives for American firms. With the Fed perversely shooting rates higher there is no direction but down for economic growth and consequently profit growth. And there is no reason for high valuation multiples under this scenario and consequently I expect the market to fall ferociously before a bottom is made.
Interest rates will also take a breather this week as bonds are deeply oversold. But this too won’t last more than few days as talk of disinflation is disappearing and fears of sustained inflation from prolonged War in Ukraine and lockdowns in China become conventional wisdom. Rising rates explain the rising $US but the consequence extends beyond financial markets to the real economy, as most nations will suffer declines because their import bills go up for the things they purchase in $US. The action in Eurasia helps no one on a net-net basis, and consequently global GDP growth will decline and that can only spell lower lows in equity markets.
But there are other risks too. 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 added incrementally to my position in 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.