Market Forecast For the Week of November 13, 2023: Santa Claus Returns Home As The Bulls Open Their Presents Prematurely

FORECAST: The S&P 500 rises modestly to 4450 before sinking back to the 4350 level, as jejune optimism over seasonal trends gives way to fear over the chasm of converging bearish trends. Expect a further leg lower into Thanksgiving as long-term interest rates ratchet higher and the bulls discard their Santa Claus fantasies for the hard reality of a slowing economy and persistent inflation.

The consumer is king and the bulls have ridden solid spending trends all year, but the data is starting to show a different picture. Survey data released Friday points to declining confidence and rising inflation, manifesting the Federal Reserve’s conundrum of rejecting its statutory dual mandate in favor of undeniable economic logic. The Fed can’t hope to bring down inflation expectations unless it diminishes confidence to the point that jobs are lost every month rather than gained. Not only has consumer sentiment declined for 3.5 months straight but this exceeds any previous stretch since the pandemic. And as sentiment declines so too the 5-year inflation forecast by consumers has hit a new 5-year high. Consumers sense the Fed’s conundrum and so does the bond market, re-inverting in the past week with short-rates rising on inflation while long rates decline on peak growth.

While the bulls have lately ignored these indicators the top-down forecasts of 2024 earnings are beginning to reflect declining confidence in double-digit growth as the economy slows. Recent earnings from the 3rd quarter paint a middling picture of an earnings trough with substantial uncertainty ahead. Expect investors to question their certainties about corporate profit magic and bring down valuations to the October lows in line with a decelerating economy and hyper-vigilant Fed.

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.