Market Forecast For the Week of September 19, 2022: It’s Fruitless To Climb The Stairs When A Strong Wind Pushes You Down, But The Always-Invested Crowd Have No Choice But To Keep Trying

FORECAST: The S&P 500 falls to 3820 before recovering and rallying back to 3950 by the end of the week. The stairstep pattern of lower lows followed by monstrous headfake rallies that’s plagued the markets since January 4 continues through September and October as the index flutters down to an eventual retest of the June lows. Whether that retest marks a double bottom or just another step toward yet lower lows depends on when the American labor market breaks and what unforeseeable Eurasian geopolitical developments occur in the meantime.

The headfake rallies that have stupified bears like myself are due in large part to earnings estimates that have stayed elevated despite all the bad news that’s flowed since January. But now Wall Street is evenly divided between those who deride sell-side analysts for stubbornly maintaining their estimates and the perma-bulls who believe those analysts and whose mandate is to be fully invested anyways. Margin compression seems likely given that jobless claims are easing, while consumers normally react to reduced real incomes by seeking out discounters. The bulls hang their hat on disinflation happening sooner rather than later but what is more sensible is recognizing firms will partially pass through high costs and this generates the persistent inflation that is simply unacceptable to the Fed. Persistent rate hikes by the Fed eventually break the labor market but not until the damage has been done to corporate cost structures.

The market is thus dealing with a hawkish Fed this year and crimping margins next year, assuming that wages are as sticky as they’ve been since The Great Depression. This analysis lines up with the consistently low inflation expectations given by forward indicators in the bond markets for the 5- and 10-year look-ahead periods, and with the fact that the S&P is down almost 20% this year despite analysts calling for marginally positive earnings growth this year and high single-digit growth next year. Only those estimates have to give way to bring the perma-bulls into alignment with market data. This includes the raging strength of the $US and its negative effect on MNC earnings.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and SPXU, all of which still nets out to a meaningful short position in equities.