Market Forecast For the Week of February 26, 2024: The Bulls See A Winter Of Disinflation Pulling Forward Glorious Earnings

FORECAST: The S&P 500 rises to 5120 on the back of irrational exuberance regarding productivity and disinflation. The AI boom that’s boosting Nvidia and its competitors won’t have any positive effects on inflation this year or next, rather it will stimulate consumption due to the wealth effect of high equity markets. Rising consumption means persistent inflation, so the bulls are ignoring the negative offset to their own exuberance, and this will persist until inflation data tells them otherwise.

The first potential sign of stalling in the disinflation trend will come this Thursday with the release of Fed’s preferred gauge of inflation for January. Should that confirm what Fed governors have been hinting then the S&P will correct violently. From there a consolidation likely takes us to the mid-month CPI report. But if this week’s report is benign the markets will likely take off and constrict the equity risk premium further, as the bulls argue for no equity premium at all, validating the clear polarity in confidence that favors the US over Europe and China.

Both the action in the dollar and in commodities markets suggest this polarity is entrenched, as the EU can’t paper over its regional differences and the Chinese Communists can’t boost the confidence of of its people. US equities are getting the benefit of this inequality, resulting in a bubbling market that fuels overconsumption and gives the American people relief from the desultory political context. The bulls are betting this is the winter of disinflation rather than discontent, regardless of reality or the long-term consequences of irrational exuberance.

My current positions include 3M (MMM), Pfizer (PFE), a large position in UPRO and a smaller position in SPXU, which nets out to a long position in equities.