Market Forecast For the Week of July 18, 2022: As Joe Biden’s America Increasingly Resembles Jimmy Carter’s The Markets Are Bracing For A Late Summer Catharsis
FORECAST: The S&P 500 rallies to 3900 and then stalls out, setting the stage for another leg lower and new lows for the year by the end of July. Unhinged currencies marry with unhinged domestic politics to set a mood of pessimism that enervates the bulls and brings traumatic fears of a 1970s-style global recession. But assuming no further domestic or geopolitical bombshells devastate investor psyche, the bear market finds its ultimate lows in the 3400 region as investors fear of Murphy’s Law abates and valuations suddenly appear irresistibly low.
The unnerving weakening in the €, ¥ and numerous other currencies mirrors the fall in copper, gold and numerous other commodities that together signal a dramatic drop in global GDP expectations. From this ensues inverting yield curves that are always a problem for capital markets but especially so now because for the first time since the GFC the M2 money supply has declined over two consecutive months. A drop in money supply combined with stringent bank capital requirements result in complete uncertainty about how liquid bond markets are, eerily reminding investors of the contagion that followed the subprime mortgage bond and Lehman collapse of 14 years ago. To this uncertainty add fears of asset bubbles in crypto-nonsense that calls to mind the equally mindless dot-com/Y2K bubble that followed an earlier bout of ultra-easy monetary policy. And to this composite of fears add memories of the stagflationary 1970s when monetary policy was last seen as ineffective at combating inflation. That episode similarly included political dysfunction and resulted in a grinding 2-year bear market. The upshot is that history-minding investors are primed to watch for a high volume capitulation selloff that coalesces this unwieldy mix of bad memories.
With everyone waiting on one another the markets can’t actually meet expectations, and instead rally and fall with high volatility but distressingly low volume, prolonging the inevitable. I expect that capitulation to come soon as second quarter earnings give the bulls additional reasons to mourn the demise of globalization and stable macro policies. Earnings reports peak in the last week of July, which will mark peak pessimism and a profound buying opportunity should politics across America and Eurasia fail to deteriorate any further.
On Friday I initiated a significant short position on the S&P 500 via the levered ETF SPXU. My current positions are a much smaller but still large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETFs UPRO and SPXU.