Stocks had their best week of the year so far and staged impressive gains. The breadth of the rally this week was impressive. The S&P 500 and Nasdaq posted gains for four days in a row. The Nasdaq rose an impressive 8.1% this week. Friday in particular was marked by the conspicuous strength of several leading Technology stocks like Apple, Meta, and Nvidia having significant gains. The obvious question after such a strong rally is whether or not will mark a tradable bottom. So far, the 2/24 lows that occurred on the day of the Russian Invasion of Ukraine have held. The Federal Reserve took the much-anticipated action of raising the Federal Funds target by .25 bps, as was expected by most analysts. With inflation running hot by all measures, and with the added inflationary pressure from the war in Ukraine, the primary focus of the Fed has shifted to fighting inflation. The indications from the dot plot suggest that the Fed will raise by .25 six more times before the year is over.
One major question that remains is whether the Fed will need to raise the benchmark rate above neutral to assist in slowing growth. The committee so far believes that they will raise the benchmark rate to a peak of 2.8%, above their predicted neutral rate of 2.4%, sometime in 2023. However, hawkish voices on the FOMC like James Bullard and Christopher Waller are calling for much more aggressive actions. Bullard was the only board member to dissent on the vote, instead preferring a more aggressive rate hike of 50 bps. He would have the equivalent of 12 rate hikes this year if it were up to him.
The Fed conspicuously expects employment to be virtually unaffected by their actions on rates over the next few years. Some analysts have said they believe it is wishful thinking for the Fed to expect unemployment to tick up so little despite such a large increase in rates over the forecast period. Time will tell, and the pace of inflation in stickier areas like rent and services will also have a bearing on how hard the world’s strongest bank decides to fight generationally high inflation. Some are worried the Fed will be more willing to overlook effects on employment and growth because of the increasing urgency on inflation.
While markets process the most perilous tightening cycle in a generation, they also get used to the ugly prospect of an unrestrained ground war in Ukraine. Russia’s army is continuing to struggle against determined Ukrainian resistance and is resorting to more and more brutal and indiscriminate tactics. Recent attacks in the Western part of the country have led to rising fears of a potential direct confrontation with NATO. Our data science team has been keeping track of official reports out of Ukraine.
Russia averted a bond default despite the extensive and unprecedented economic sanctions being used against it by the West. The Ukrainian economy has rapidly adjusted to a wartime posture, and while it is obviously reeling from the effects of a high-intensity conflict on its soil, the improvisation of the Ukrainians and many aid organizations have kept lifelines open to vital areas. Besieged areas like Mariupol, however, are facing humanitarian catastrophe on a scale not seen in Europe for many decades.
The immediate economic impact of the war seems to escalate as the West’s primary mechanism to punish Russia is of the economic variety. Steel products have recently been included in the salvo of export bans being lobbed between Russia and the West. Even the high-tech chip supply chain isn’t safe from the war. Ukraine produces nearly half the world’s neon, which is necessary in the etching of chips. The food, metals, and energy supply chains are all heavily affected by the war and resulting sanctions. Obviously, the sooner a peaceful resolution can be achieved, the better for the global economy.
Consumer and investment sentiment are reaching multi-decade lows and as Our Head of Research, Tom Lee, has been saying this week a lot of bad news appears to be already baked in. Markets do not price things the way any one of us thinks that they should, they wouldn’t be market if they did. While we may see the images coming out of Eastern Europe and recoil at their horrific nature, the market does not. We have to remember that in some of the darkest and most uncertain times of the twentieth century markets bottomed well before resolution or clarity was definitely achieved. American stock markets bottomed after the Battle of Midway, long before victory was assured. Whether or not a bottom has definitively formed, we cannot tell at this time. Our Head of Technical Strategy, Mark Newton, sees some reasons for caution ahead. Other indicators we pay close attention to suggest caution is merited. Nonetheless, sentiment and valuations are getting compelling. From a risk-reward perspective, despite many short-term risks, we still believe equities are compelling if you have a six-to-twelve-month time horizon. Markets have a ‘skyscraper’ of worry to climb, no doubt, but historical experience tells us that they can do it. Our base case is still a strong second half for stocks.
