Market Forecast For the Week of January 16, 2024: The Bullish Roar Devolves Into A Gentle Moo As Politics Takes Center Stage

FORECAST: The S&P 500 makes a marginal all-time high at 4840 before correcting again to the 4700 region as the bull market preens on with decreasing conviction among the bulls and increasing agitation among the bears. With modest economic releases this week supplemented by 2nd-tier financial and manufacturer earnings reports the stage is set for a dull continuation of the bull run until the core of earnings season arrives next week. At that point I expect unimpressive earnings and weak guidance to calm the bulls and gird the bears into taking control and sending the index back to its Autumn lows.

Key to earnings is the robust expansion of margins as both domestic and global GDP slows. How earnings can grow 12% in 2024 when the bond market sets the 10-year yield at 4% (implying nominal GDP growth around the same level) and wages grow at a 4% clip is something only the analyst community fully understand. But the bulls are happy to run with such esoterica and until earnings validate the bearish view the market treads higher as the Fed has suddenly become the market’s best friend.

The critical pivot signaled by Jay Powell in December has been walked back of late and more data like last week’s CPI could force the Fed to more drastic clarification. The bulls need the triple play of earnings, enthusiastic guidance and Fed friendliness to keep valuations are current levels, else exuberance will turn into pessimism as politics drives the country into ever rising anger.

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