Commodities continue to run. Interest rates are hitting new highs, and stocks are holding their gains from last week. Nothing has changed on the geopolitical front and all eyes are once again focused on the Fed and its’ next meeting in May 2022. What else is new?
Stocks have been surprisingly resilient this week in the face of dire predictions that a recession is just around the corner. Many investors, and those who preach to them, are convinced that the Federal Reserve Bank is intent on hiking interest rates to a level where the economy will collapse as inflation continues to spike. One Citibank research team is now predicting 50-basis point increase in the Fed funds rate in May, June, July and September, with a 25-basis point hike to follow. I am not in that camp.
You might remember back in December 2021, when I warned readers that Wall Street analysts would begin predicting a stagflation scenario sometime in the first quarter of 2022. Their conclusions are understandable, given the macroeconomic data, but I suggest that you take their predictions with a grain of salt.
Today, it is fashionable to say that the Fed has lost its credibility. Granted, their stance on inflation, which they described as “transitory,” proved to be wrong. I believe that global supply side shortages due to the coronavirus pandemic contributed to that miscalculation. It seems to me that estimating the extent of those shortages was, and still is, impossible for anyone to predict.
But that does not mean that the Fed is no longer creditable. Fed Chairman Jerome Powell and his FOMC members must thread the needle between raising interest rates to quell inflation, but not enough to hurt the economy. I don’t envy their position, but I remain confident that they can do it, if anyone can. What I don’t want to do is listen to forecasts from analysts with little or no experience in the areas of inflation and/or rising interest rates.
The war in Ukraine is now more than one month old. What Vladimir Putin believed would be a three-day war has resulted in a disaster of alleged war crimes, high casualties, and few Russian victories. The sanctions imposed by the West are beginning to bite and NATO is fast at work shoring up their defenses in Eastern Europe. It is a tinderbox looking for a match.
As such, headlines are still the main market movers with percentage point gains and losses commonplace. As I have written, if the VIX, the so-called fear gauge, continues to stay above 20, these big moves will continue. The good news is that VIX is now below 22—down from more than 30—two weeks ago.
I am keeping my fingers crossed, praying that a cease-fire could be in the offing soon. It appears that negotiations are progressing, although not as fast as most would like. Weather may play a part in bringing the two sides together. It is almost time for the sowing of wheat in Russia and Ukraine and without it, the world’s population in many developing areas will suffer.
In addition, the change in weather will also bring a thawing of the land in Ukraine. Rivers will rise, rain will fall, and the frozen earth will turn to mud. It will become a nightmare of logistical problems for the Russian invaders, as it did for the Germans in World War II.
As for the stock market, given a six percent spike in almost as many days a week ago, a brief period of consolidation is to be expected for a day or two next week. If the S&P 500 Index can’t get above the 4,530 area in the next day or two, I would expect the three main averages could give back some of their recent gains. That would be a dip to buy because I still see the S&P 500 Index closer to 4,600 by the third week in April 2022.