Market Forecast For the Week of June 21, 2022: Massive Head Fake Underway As Holiday Cheer Enfolds Markets But Dissipates By The Weekend

FORECAST: The market rallies early in the week then consolidates through week-end as investors await news clarifying the state of the global economy. By late June the market begins a new leg lower as recession fears go mainstream and force the Fed to ditch their dual mandate for the foreseeable future. Like children going on summer holiday the market sinks as the question turns from how soon is the next recession to are we there yet?

The Fed’s decision to raise interest rates is clearly intended to quell the labor market and make it harder to ask for higher wages. But the implications for DM and EM nations across the world are more dramatic and desultory. Indebtedness was manna for world leaders seeking to leverage the crisis of COVID, taking public debt loads above GDP with little pushback since interest rates were low. But the Fed is now raising the global benchmark rate in the face of economic retrenchment, so the American consumer of last resort is likely to decrease spending at the same time countries need to run trade surpluses more than ever. The combination of worsening debt service and declining global trade can only push the $US higher and that only compounds the problem since 40% of global trade is priced in $US. This vicious cycle has driven all global equity markets lower since January, with every counter-rally a mean-spirited headfake . I see the final lows for the S&P 500 around 3500 assuming global leaders do nothing else to dispirit the global consumer and investor.

Unfortunately incoherence out of the Biden administration has become de rigeur on everything from energy and climate change to Ukraine and Middle East policy, and any more of this will permanently dent confidence in American leadership and force the Fed to shoulder the entire inflation-fighting burden by itself. Already fears of the Fed front-loading rate hikes is steepening the yield curve, and I expect US economy to fall into an official recession by year-end while labor market metrics start collapsing this summer. For anyone but statisticians the US economy will feel recessionary by midsummer and that will likely mark the point of maximum pessimism where the markets look most attractive.

My current positions remain a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.