Market Forecast For the Week of September 6, 2022: The Clouds Won’t Be Chased Away This September

FORECAST: The S&P 500 rebounds to 4050 then begins another descent to lower lows by the end of the week. Optimism regarding peak inflation and a return to a dynamic labor market grips investors early in the week and forces the shorts to cover, but evaporates by Friday as rising interest rates and the $US leave no room for optimism about the global economy.

Interest rates are on a one-way street due to the Fed’s unambiguous intention to raise short-term rates as well as the less understood effects of its balance sheet reduction on bank behavior. While the relationships between banks, money market funds, mortgage securitizers, hedge funds, the Treasury and foreign investors is hard to fathom, the unprecedented reduction in liquidity the Fed is engineering is certain to lead to dislocations that play havoc with interest rates. In this environment the likelihood is that bond yields rise across the intermediate-to-long-term spectrum as investors choose cash over duration. That diminishes the attractiveness of equities especially in an environment of negative guidance across a swath of economic sectors.

But the $US’s inexorable rise is the second stick to beat the bulls with as the rest of the world deals with even worse calamities than illiquidity. Foreign investors are plowing into the $US but will increasingly choose the least risky assets to park their funds, leaving equity bulls in the lurch as they absorb the negative translation effects and lower exports that a higher $US entails. As global GDP declines with every spike up in the $US so too confidence falls and reminds people of the dreary days of stagflation, the Cold War, Middle East conniptions and commodity shortages. Ensues an equity bear market of lower lows through the seasonably troublesome Autumn months.

Lower valuations are the cure to overconfidence, and should analysts start another round of earnings estimate reductions then equity prices will have to go that much lower to settle at reasonable valuations. Since mid-August analysts have stubbornly maintained their estimates on all but energy companies and consequently fiscal 2022 still shows positive earnings growth for the top 100 firms in the S&P 500. And despite the resurrection of 1970s phenomena the estimates for fiscal 2023 are near 10%. If analysts are right then the bottom will occur on a simple retest of the June lows, providing an historic buying opportunity as a real bull market slowly forms. But if interest rates break their June highs then earnings growth is bound to tail off and the final lows will likely be made in the 3400 region.

My current positions are a very large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which nets to a moderate short position in equities.