Market Forecast For the Week of September 18, 2023: Cooler Temperatures Mix With Cool Traders Waiting For September to Pass Unnoticed

FORECAST: The S&P 500 continues to range trade as rallies early in the week give way to declines that keep the average floating around 4450. Priced for perfection megatechs are scaring off the bulls while the bears wait with declining patience for earnings data to validate their negative theses on the global economy. That data being weeks away the market moves cautiously as September draws to a close, with low volatility a prelude to a spike in the 4th quarter.

Key is the path of inflation and what it does to margins and interest rates. The bulls expect a nascent productivity boom to offset declining pricing power, allowing margins to grow along with robust consumer spending. This seems doubtful as consumer spending has been fueled by debt and those servicing costs will rise as interest rates inexorably ratchet higher. Moreover inflation expectations are too high for the Fed and gasoline prices look set to stay higher for longer, draining consumer incomes. And the action in the US dollar and commodities reflect a sober global scene, with less pessimism re China but more pessimism re Europe. Finally bottoms-up earnings expectations have failed to rise meaningfully to confirm top-down estimates: in the past two weeks estimates have hardly changed for the top 100 firms and suggests concerns over corporate guidance to come. The summer of exuberance has yielded to a slow and uncertain Autumn, with all hopes for the Winter resting on more debt to finance insatiable American appetites. As inflation remains stubbornly resilient consumers may trade down and take markets along for the ride until Santa comes to the rescue.

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.