Market Forecast For the Week of December 18, 2023: The Bulls Exhort The Bears To Ride In Their Beautiful Balloon

FORECAST: The S&P 500 rallies to 4770 as the bulls bet on bubbling optimism trumping sobriety and providence in the final weeks of 2023. Data coming out this Friday will either validate the bull’s bizarre bet or destroy the momentum and set the stage for a 10% correction to start the new year. Should disinflation show up in the upcoming PCE report then even the last remaining bears will be pulled into the chase for return, delaying the eventual pullback but making it all the more severe when it finally does happen.

Nominal GDP above 5% is the bullish bet for 2024. The scenario unfolds as follows: as the Fed engineers the rare no- landing that helps GDP growth eventually overtake inflation as the economy avoids recession and begins a gradual return to trend by 2025. The latter half of the decade sports nominal GDP growth around 4% and that in turn sets the stage for sub-4% interest rates, making a 20-21 PE multiple on S&P 500 earnings both reasonable and mouth-watering. Based on such logic the current rally has room to run, with the all-time high just above 4800 within reach by New Year’s. But the Fed’s preferred method of calculating core inflation remains above 3% and the inflationary mindset has yet to evaporate among consumers and producers. Only positive results this Friday can change those facts. The sober bet is for gradual disinflation and a bottoming out of oil prices, which force the Fed to keep rates higher for longer as they had been saying until last Wednesday’s press conference. Should the PCE report disappoint along such lines then expect the rally to crumble and the S&P to painfully make its way back to the October lows of 4100.

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