Market Forecast For the Week of September 26, 2022: The Effervescence Of TINA Is Giving Way To The Sobering Tone Of TAPS

FORECAST: The S&P 500 makes new lows at 3590 as bullish investors throw in the towel and start raising cash on fears of geopolitical deterioration and ecological unpredictability. Ensues a counter-rally that catches shorts over-leveraged to their bearish positions and sends the index back to 3800 for a short-term bounce. Unlike the monstrous bear market rally from the summer this counter-rally fizzes out early and sets up an October swoon catalyzed by negative guidance as earnings season gets underway.

Where the ratio of equities returns to bonds on January 4th expressed itself as There Is No Alternative the accumulation of economic, ecological and geopolitical stresses now gives rise to Things Are Pretty Scary. Investors now wonder whether the fall of existing bad actors like Putin or the Iranian theocracy would be a harbinger of even worse violence and worse acting to come. And the topsy-turvy phenomenon of bearish reaction to an ebullient British liberal versus nonchalant acceptance of a neo-fascist in Italy makes Europe look like the next domino to fall. This atop the European energy crisis that can only intensify should extreme and unpredictable weather continue to dog 2022. The break in the € and £ suggests breakage in the financial markets is menacingly close.

While the US economy softens and offers a safe haven in cash accounts the other major driver of economic growth is more worrisome. Chinese confidence as measured by the Shanghai Composite is eroding from the confluence of bad policies and ecological insecurities, and both likely intensify over the Autumn and Winter. Should the Chinese masses seize on the coronation of Xi Jinping as a moment to vent their accumulated grievances the Composite will break and lead global equity indices to deeper lows.

Corporate earnings growth is the sole variable motivating investors to buy the dip, and notwithstanding numerous examples of negative guidance the estimates of 2023 growth have barely fallen from summer levels. Not only do analysts see profit margins holding up but revenues too are expected to withstand the raging $US, despite clear signals from commodity markets and yield curves that global growth is falling with each uptick in the dollar. I expect estimates to come down in earnest only once firms begin reporting 3rd quarter earnings in early October. From there it will matter little whether bond and commodity prices rebound, as increasing geopolitical certainty will give the remaining bulls plenty to fear. The question now is not how deep the market goes into negative territory, but whether 2023 offer any reason for a new bull market to get going.

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