Market Forecast For the Week of July 11, 2022: The Bear Market Rally Ends As Eurasian Politicians Mulct US Firms

FORECAST: The S&P 500 rallies to 4000 and then abruptly falters, setting up for a swoon to new lows by the end of July. Competitive devaluations across Eurasia embolden the bears as investors fear the end of globalization and a profit recession that exceeds in depth and length the economic recession that’s already setting into GDP numbers. The S&P 500 eventually bottoms close to 3500 assuming no further political shocks by that time, setting us up for a late summer rally into the Autumn that slowly retraces much of the decline that began January 5.

Beggar-thy-neighborism has set in once again as Europe joins Asia in devaluing their currency in the face of burgeoning energy imports. Such devaluations force the US the bear a share of the global GDP rescission, since American exporters suffer while imports rise. But these devaluations are stealthy measures to boost home countries at the expense of the US, since the $US is raging only because the American leaders are confident enough to exact strong economic medicine in the form of monetary tightening. The ECB is signaling that Italy and other peripheral countries can’t stomach rapid interest rate rises, so by keeping their tightening glidepath below the Fed’s they engineer devaluation. Japan is similarly resisting rate hikes and China is actively trying to stimulate rather than retrench its economy. While a stronger $US frees the American consumer to import more, American MNCs find their profit margins crushed by the currency translation effect on their exports. This may well reverse in quarters or years to come, but the salient impact in this political year is that protectionist impulses get stoked by the Trump dittoheads and that can only lead global investors to question whether the pandemic-induced deglobalization is now here to stay.

And global investors are already betting that global GDP declines so much that even nations like India that are robustly raising rates will suffer deep deficits as both energy bills rise and import demand from Europe and Japan declines. A strong $US does nothing to stem that decline but does set the stage for lower commodity price inflation, which eventually works its way to stabilizing energy inflation and giving oil & gas importers a break. But the cost of this adjustment is political uncertainty as Republicans continue their shift from fidelity to classical liberal principles to whatever wins elections. The stage is set for a drop in confidence that sends markets to new lows, and a possible bottom should political developments turn out no worse than expected.

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