Russia Ukraine War

A woman walks Friday next to residential buildings in Kyiv, Ukraine, that were damaged by bombs. The author says that now that the Federal Reserve's latest meeting is over (until the next one), where will investors focus their attention? The obvious answer is the Ukraine-Russia crisis. Both sides of the conflict appear to be coming closer to a cease-fire, and it would not surprise him to see a truce of some kind announced in the days ahead.

The first interest rate rise in years was officially triggered in this week’s Federal Open Market Committee meeting. Since then, stocks gained more than 5 percent on the news, which was contrary to many investors’ expectations.

The reaction was even more confusing when you consider how hawkish Chair Jerome Powell and his FOMC members were both in the minute meetings and in Powell’s Q&A session after the meeting. The Fed is officially planning for seven rate rises this year, after the 25-basis point move on Wednesday.

The next hike could come as early as the central bank’s next meeting, in May. There is no guarantee that the next hike could be even higher than 25 basis points. That, said Powell, would depend on the data. The overall message, however, was clear enough: Inflation is the Fed’s No. 1 priority and will remain so for the months ahead.

You may remember that, in my last column, I predicted that the markets would like the outcome of the meeting. The gains since then have been north of 5 percent. The positive reaction could have been fueled by Powell’s contention that the economy remains strong and is in great shape to accommodate tighter interest rates now. His prediction that inflation could end the year below 5 percent could have also heartened investors. I question that number, but I think there was another reason for the gains, which was purely psychological.

As I have said countless times, investors hate uncertainty. For months, unanswered questions have bedeviled investors. “Will they, or won’t they raise rates, and by how much?” “How high will inflation rise, and what is the Fed really going to do about it?” “Will the Ukraine war temper the Fed’s actions?” I could go on, but you catch my drift.

Uncertainty is what investors wake up to in the morning, worry about all day and obsess over when we hit the sack at night. Clearing up even a little of the unknown has a beneficial effect on a market starving for stability.

But, now that the Fed meeting is over (until the next one), where will investors focus their attention? The obvious answer is the Ukraine-Russia crisis. Both sides of the conflict appear to be coming closer to a cease-fire. It would not surprise me to see a truce of some kind announced in the days ahead. You might ask, “Why?”

It is all about the calendar. Ukraine is running out of time if its farmers hope to take advantage of the planting season for wheat and corn. If this war goes on, and the fields lay fallow, the world could face a life-threatening shortage of food. We are already facing massive shortages due to climate change and the coronavirus pandemic.

Unlike additional oil that can practically be pumped at the flick of a switch by Saudi Arabia or the United Arab Emirates, additional foodstuffs are governed by the calendar. If you miss the planting season, you can’t do anything about it until the next season, which is months, if not a year, away.

So, if I am right and the war winds down, we could see a few weeks of upside into April 20 or so. That could mean another 200 points or more tacked on to the S&P 500 Index from here. A cessation of hostilities would also recoup some of the losses in the beaten-up European markets. And let us not forget China, the world’s second-largest economy.

China’s about-face this week in promising to ensure stability in capital markets, support overseas stock listings, resolve risks around property developers and complete the crackdown on technology companies has removed another overhang weighing on the markets. If the Chinese government fulfills its promise to add more monetary and fiscal stimulus to its slowing economy, that may also eliminate some of the drag in the global economies brought on by the crisis in Eastern Europe.

U.S. stocks, under that scenario, would rise. I would imagine overseas markets would gain even more in the short term. But, all these bullish actions would likely come to an end in late April, as the next quarter’s earnings season begins, the May Fed meeting and another rate hikes loom closer and the inflation rate tops 10 percent.

A good chunk of the the move in equities this week has been simply short covering. It remains to be seen if real buyers decide to push markets higher. There needs to be a fundamental reason for that to happen. It could be a cessation of hostilities.

I still see a difficult first half of the year that will probably spill over into the summer. Sure, we can have relief rallies like we are in right now. But, for me to become more bullish, I would need to see earnings bottom, inflation subside and the Fed to stop tightening monetary policy. Don’t hold your breath.

Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401, or email him at billiams1948@gmail.com.