Market Forecast For the Week of November 27, 2023: The Winter Of Discontent Is Temporarily Postponed As The Bulls Pad Their Annual Returns

FORECAST: The liquidity-driven rally continues as the S&P 500 rises above last week’s highs but caps out at 4575 before consolidating for the remainder of the week. Worries over weak global growth vie with exuberance over outsized US growth and draw money into equities to keep the Santa Claus rally going in fits and starts for another few weeks. By mid-December expect a retest of the August highs followed a high-volume wave of profit-taking that sets up for a rocky start to what promises to be a rocky election year.

Foreign inflows are crucial to the market and are reflected in the action in the $US currency markets, where the major currencies like the €, ¥ and Chinese Yuan bid higher as their native investors hedge out their growing exposure to US equities. As long as the dollar continues weakening against the majors the global economy will be assured of avoiding recession, which feeds back into continued exuberance for US big tech and MNCs. But the action in EM currencies and in commodities reveals the concerns over non-US growth for 2024. For the Santa Claus rally to continue into 2024 these markets need to catch up with US equities and that looks doubtful given the persistence of inflation and raft of geopolitical problems facing the world.

What central banks have given recently in terms of growing bank reserves and yield curve control likely reverses course in 2024, keeping rates higher for longer and bringing out the inexorable downturn in US growth that I expected in 2023. Profit expectations will be the primary victim of this downturn and that will pull the S&P right back to its October 2023 lows and eventually to a retest of October 2022 lows as well.

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.