Market Forecast For the Week of March 6, 2023: A One-Week Stand Among Bullish Investors Will End With Everyone Going Their Separate Ways
FORECAST: The S&P 500 races back to retest the 4200 level as the bulls feast on last week’s failed bearish try at forcing lower lows. Belief in the ever-lengthening long-term nature of restrictive monetary policy fuels bullish bets on a smooth decline in both inflation and employment, allowing corporations to soberly manage revenue and cost risks and produce positive earnings growth this year and double-digit growth next. Further exuberant assumptions about future productivity and inflation trends mirroring the experience of the past 40 years emboldens the bulls to reach for last summer’s highs even as interest rates ratchet ever higher and firms deliver kitchen-sink results and guidance.
Such vacuous ratiocination is bound yield a low-volume run-up at 4200 that will mark the end of this unprecedented bear market rally. Not only are quality of earnings data portending lower earnings this year but far-reaching cultural and political trends belie a new era that won’t see a return to productivity, globalization or zero-inflation for years if not decades to come. Until the electorate vote out the pro-state, anti-corporate conservatives and progressives we are set to witness more deglobalization and government intervention no matter who wins the Presidency or Congress. The anologue is the Nixon-Ford-Carter decade where interest rates zig-zagged at high levels rather than the go-go era beginning in 1980s that was fueled by a historic bond market rally. Ultra-high real interest rates are here to stay until a deep recession cuts consumer savings down and revitalizes the work ethic.
And even then the productivity and innovations that accompanied the great inflation moderation and corrolary bond market rally won’t return until the regressive political and cultural climate dies and takes inflationary tendencies out with it. The Fed will do its part to keep real interest rates at 2% or more until they see a return to the pro-markets mindset that produced ultra-low inflation in the 2010s. At current valuations the bulls are ignoring the Fed and pricing in zero real rates and a modest equity risk premium, setting us up not only lower lows this Spring but a rocky road back to old highs in the years to come.
On Friday I exited a portion of my short-term bullish position in the levered ETF UPRO and simultaneously bought a small position in the inverse levered ETF SPXU. Consequently my current positions include a very large cash position, 3M (MMM), Pfizer (PFE) and offsetting small positions in UPRO and SPXU.