Market Forecast For the Week of August 1, 2022: The Bear Market Rally Fizzles Out And Weak Currencies Lead Equities Back to Old Lows

FORECAST: The S&P 500 rises to 4184 and then begins a gradual decline lower as geopolitical horrors marry with economic worries to sap investor confidence. A retest of the June lows occurs around mid-month followed by new lows that mark a true bottom as a summer of discontent draws to a close.

Geopolitical anomie is spreading, whether one looks at belligerence from East Asian dictators like Xi Jinping and Kim Jong Un, food and energy shortages across corrupt developing nations like Sri Lanka, ungovernable sectarianism in the Middle East, and the rise of leftist populists across Latin America that have more in common with Trumpism than progressive values. While this sounds like nothing new the confluence of these trends with ecological unpredictability and the ongoing war in Ukraine make this summer a particularly frangible time of simmering anger.

So far equity markets are betting the global consumer blithely ignores these trends and imitates the indefatigable American consumer. Key is the Chinese consumer who supposedly slakes off discontent over real estate troubles to keep borrowing, or the Indian consumer who slakes off inflation to keep spending or the European traveller to keeps travelling with or without baggage. Adding to these unlikely scenarios is the bet that Federal Reserve Chair Powell’s misstatement about the neutral rate will be hard to walk back. A strong global consumer married to a dovish Fed is certainly a recipe for a bull market.

But Fed dissension is all but guaranteed if Powell sticks to his belief that sub-3 percent short rates are neutral. and that will stoke investor worries about political anomie now infiltrating the Fed. And currency markets tell a different story from equities, regardless of recent strength in the Japanese yen. The deep problems of emerging markets reflect in the currencies, and add to this is the anemic rally in the €, which is likely a bear market rally that mirrors the action in equities. A strong $US hurts global trade since 40% of trade is invoiced in $US, and that in turn hurts the global economy and feeds back into strength in the $US. Such doom loops are the stuff of bear markets, and I see equities reflecting this soon.

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