Key Takeaways
  • The S&P 500 closed at 4,542.06 down from 4,462.12 last Friday. The VIX closed below $21.
  • President Biden visited NATO allies in Europe this week as the war in Ukraine raged on. NATO estimates up to 15,000 Russian Soldiers have been killed in Ukraine.
  • The price of oil and Energy stocks rallied on Friday as Houthi Rebels from Yemen launched a successful attack on a Saudi Aramco oil facility.
  • The market is in the midst of a tumultuous second half but there are increasing signals of optimism building. Volatility could remain elevated in short-term.

After last week’s “face ripping” rally many may have expected a period of consolidation given the events transpiring in Europe and an increasingly hawkish tone out of the Federal Reserve. Instead, markets built on the gains solidly. The S&P 500 and Nasdaq were both up almost 2% on the week. Encouragingly, Energy and Technology were both the leading sectors and were both up about 4.2%. Apple was a notable outperformer this week and was up more than 6%. We just highlighted the stock in our recent Signal From Noise on stocks we like with pricing power.
There is a Ukrainian idiom for teaching someone a lesson in a profound or threatening way. As the Ukrainians say, they have really shown the battered Russian army where the crayfish is wintering. According to NATO estimates, from 7,000 to 15,000 Russian soldiers may have been killed in the conflict although the fog of war makes preciseness impossible. Incredibly, the resistance in Mariupol is still hanging on despite an onslaught against the urban center the likes of which have not been seen in Europe for generations. The Ukrainian destruction of a Russian landing craft this week may also make them hesitant to conduct further amphibious operations. Ukrainians have been pushing the Russians back around Kyiv.

Unfortunately for markets, the war does appear to be grinding into a stalemate. While we, like much of the world, are hopeful for as quick a peaceful resolution as is humanly possible, both Ukrainian and Russian negotiators appear to be taking maximalist positions that don’t bode well for the prospect of compromise. Surely, Ukrainians are not in the mood to give up large swaths of their country to a belligerent that they appear to be turning the military tide against. Vladimir Putin, while enigmatic in many ways, doesn’t seem like the type of guy who is willing to humble himself and his country’s martial reputation unless he absolutely has to. This is why the prospect of continued escalation by the Russians in continuing to level cities and potentially even the use of weapons of mass of destruction is uncomfortably high.

If upward pressures on energy prices weren’t bad enough, the Houthi Rebels launched a successful attack on Saudi Aramco facilities on Friday which spooked the market before it closed in the green. The missile attack hit an oil depot in the Saudi city of Jiddah where a Formula 1 Grand Prix was going on. Racers plan to drive as scheduled and like markets, moved on quickly from the unsettling event. North Korea also conducted its first ballistic missile test in years this week as well. When it rains, it pours!

Don’t be fooled though, green shoots for stocks are steadily building on our radar screen. So, while there is a lot of risk to the downside, the other is also true. If there were an unexpected peaceful resolution to this conflict then markets might even be able to establish new highs as unlikely as it may seem. We see evidence that inflation from pandemic-induced supply kinks could be mitigating. As our Head of Research, Tom Lee, has pointed out 2/5 of the stocks in the market had been down more than 20%. So far, at least, his pre-invasion advice to “sell the runup, buy the invasion” has worked out quite nicely. Remember the old saying, markets rise on a wall of worry and fall on a slope of hope. The worries are still piling up but these last two weeks have been reminiscent of The Little Engine That Could.

While the negatives are certainly prominent and headline-grabbing the market would not have been able to climb as much as it has in two weeks without some positive developments. The world’s second-largest economy appears to be backing away from supporting Russia. President Xi of China and President Biden has a productive phone call that resulted in some of the trade restrictions and tariffs between the two nations being alleviated. This is obviously a good thing for markets. The devastating outcome of China agreeing to give military assistance to get Russia out of its Ukraine folly could have really whacked markets, but alas a better outcome seems to have materialized.

The 10-Year Treasury broke out above 21 highs. While this may portend some more upside momentum in the short-term our Head of Technical Strategy, Mark Newton, expects yields to hit resistance next week before beginning a retreat downwards. If rates do indeed turn downwards soon this may provide some added fuel to equities. As rates go downward P/Es tend to expand. Stocks with greater portions of their net present value comprised of earnings in the future, like Technology giants, should be able to capitalize on this turn of trend if/when it begins. A lot, as always, will eventually come down to the Fed. The tightening cycle is underway, and equities have held up well considering that and the first ground war in Europe in decades. However, one large question is whether Fed policy can even help alleviate the types of inflation we are facing. Nobody should be envying the perilous task ahead of the Fed in attempting to achieve a soft landing. As Ron Insana said in an article he wrote today, “The inflation hawks, some of them housed at the Federal Reserve, may be right for all the wrong reasons.” Answering the great question of the day for markets, whether inflation is caused by idiosyncratic pandemic supply chain issues or superfluous monetary and fiscal stimulus will be very crucial to the economic fortunes of the United States and the world.

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