Market Forecast For the Week of August 29, 2022: Low Volume And Paralysis By Analysis Is Done, So Let The Selling Begin

FORECAST: The S&P 500 begins a descent to new lows on the thrust of Jerome Powell’s short straight talk from ruggedly beautiful Wyoming. Expect the index to hit 4000 in short order before consolidating as we approach September. Further selling erupts late in the week as investors weigh the Fed’s antipathy to a tight labor market and consequently reduce exposure in front of a long weekend intended to honor American labor.

Rising interest rates, a rising $US, political paralysis in Europe, Russian malevolence and Chinese lockdowns form a network of nasty issues that plague global markets in the aftermath of the pandemic. Add to that a dozen other issues of deep humanitarian and political-economic import and we face a wall of worry too daunting to maintain confidence. Just as the cure to high gas prices has largely been high gas prices, so too the cure to overconfidence is lower valuations and political replacement that restores balance and the belief in policy credibility, however convenient and vain that may be.

Since such changes are weeks if not months out pessimism now reigns supreme. And the list of issues to buttress pessimism seemingly grows by the hour. Incomprehensibly disastrous flooding in Pakistan is just the most topical example of issues that lie outside of conscious deliberation by global investors but which nonetheless drain confidence. The diversity of potential consequences from such issues can’t be coherently folded into a view on future economic growth, let alone a narrative of robust growth. When investors feel such intellectual paralysis the result is either a collapse or grinding bear market, and I see the latter playing out through September. Only negative developments in the US labor market that match the Fed’s wishes can point us to a bottom, and that will likely require not just this week’s jobs report but the next one in early October. That leaves time for the markets to retest the June lows and likely break them.

On Friday I exited my position in the levered ETF UPRO, and simultaneously reduced some exposure on the short side by reducing my position in the inverse levered ETF SPXU. So my current positions are a very large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the levered ETF SPXU.