Market Forecast For the Week of January 29, 2024: The Bulls See Only Sweetness And Light As China Gets On The Money Train

FORECAST: The S&P 500 melts up to 4950 as China joins the US in stimulating equity markets with ample liquidity and projections of future rate cuts. With the salivating potential for tax cuts as Trump-mania peaks the bulls argue now for a decades-long boom that makes current valuations look like a can’t miss opportunity. And as with all episodes of irrational exuberance the current melt-up will end badly once earnings are fully digested and the bulls take notice again of the unfolding geopolitical and cultural horrowshow that will keep confidence low and macroeconomic imbalances growing.

The bulls see AI as modern version of the dot.com boom that transformed the global economy and led to long business cycles up until the pandemic. But since AI has no historical precedent and its potentially catastrophic consequences are sirened not by luddites but the very inventors of the technology themselves, the overwhelming likelihood is that the productivity boom fails to materialize either for commercial or political reasons. Failure to dramatically raise productivity is catastrophic for the markets for three reasons: 1) valuations are high relative to interest rates; 2) government debt loads are unsustainable in light of negative demographic and geopolitical changes, and; 3) the productivity-negating impact of protectionist policies and the ever-growing list of geopolitical crises driven by anti-globalization, anti-Americanism and climate change can only attenuate confidence. The bulls are content with seeing the sunlight through the clouds but once earnings season ends expect the the symmetric opposite of the melt-up that takes equities back down to the October lows.

I am effectively neutral on the market, as my current positions include 3M (MMM), Pfizer (PFE), and a small position in UPRO and a larger position in SPXU, which nets out to a neutral position in equities.