Market Forecast For the Week of October 2, 2023: Sunny Weather Temporarily Replaces The Rain On Wall Street

FORECAST: The S&P 500 snaps back toward 4400 and cheers the bulls before crushing their hopes and falling again as the Autumnal correction persists into October. Fears of a global slowdown have been temporarily assuaged with the drip-feed of Chinese stimulus, but across both the wealthy and developing world the outlook dims under the weight of heavy debt loads and low productivity. The correction can only end with certainty on either the corporate earnings front or the economic trajectory of China, and neither will become apparent this week or next.

The bulls can’t rely too heavily on China, given Xi Jinping‘s recent track record and the action in the Shanghai equity market. Pessimism likely intensifies and leaves the bulls to fall back on earnings, where the context appears positive. Despite rising consumer delinquencies and low productivity there are few signs that firms will pre-announce poor results for the 3rd quarter. The bears can point to a long list of reasons to be pessimistic but the 2nd quarter failed to bear them out, and estimates have remained stable through September. The bulls are prudently betting that historical trends of high corporate efficiency and a spend-til-you-drop consumer mentality will persist into 2024. Until firms tell us differently the odds are that the 3rd quarter earnings season brings back the bulls with a vengeance and sets up for a retest of the 4600 range by the time Santa arrives.

But longer term the key will be the course of inflation-adjusted interest rates. Both the dollar and US rates look set to stay higher for longer as the strong US labor market keeps consumption alive and draws flows away from Europe, Japan and EM nations. The problem is that productivity often dips when inflation runs hot, and inflation likely remains persistent but capped in the 3% range. Should rates remain high on the belief that the Fed will tolerate 3% inflation then equities will face an impermeable ceiling. The bulls vainly hope instead that deflation saves the day but if inflation persists then 4600 will mark a double top and set markets up for a rocky start to 2024.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.