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@theMarket: Stocks Trapped in a Box
By Bill Schmick, iBerkshires columnist
04:23PM / Friday, February 18, 2022

Over the next three weeks, equities will likely trade in a wide range. The caveat to that forecast: if the Fed suddenly changes policy, or if a shooting war erupts in Ukraine. Those are two big ifs. Unfortunately, I can neither forecast when or what the next Fed head will say, nor predict Vladimir Putin's next move.
 
The next Federal Open Market Committee meeting occurs in mid-March. The latest CPI and PPI inflation data shows inflation accelerating at a rate much higher than economists and the Fed expected. It is all but certain, according to the bond market vigilantes, that the Federal Reserve Bank will raise interest rates at that time. As such, it is only a question of whether the rate increase will be a 25 or 50 basis point hike.
 
That will be only part of the equation. Investors will be expecting Chairman Jerome Powell to give them more insight as to how many rate hikes they can expect going forward, and what other monetary tightening the Fed will be planning as well. The risk will be that the equity market could swoon and test the lows if the Fed is perceived as more hawkish on tightening than expected.
 
That in the meantime, we have plenty to occupy our attention. This week the market's interest rate worries have been superseded by Russia's intentions toward Ukraine. Thus far, the conflict has been played out in the media in a "he said, she said" war of charges and counter charges.
 
War is never a good thing, suffice it to say. But besides the human costs of such a conflict, there would also be an economic price to pay. The sanctions that the U.S. and its allies are prepared to inflict on Russia in response to perceived aggression would inflict damage on the global economy and on the U.S. as well.
 
Russia supplies a great deal of the commodities that the rest of the world consumes. Sanctions could immediately cause substantial price spikes in commodities such as oil, gas, and coal. Russia is also a major exporter of rare earth minerals and heavy metals. One third of the world's supply of palladium (used in catalytic converters), for example, and titanium (think aircraft) is also mined and exported by Russia.
 
Ukraine is also a major source of neon, an essential input in the manufacturing of semiconductors. The Ukraine is one of the world's largest producers of wheat, as well as fertilizers (as is Russia). Hostilities could damage their ability to export or even harvest the nation's wheat supply.
 
I would expect price spikes in several food commodities as a result. That would add fuel to the inflation fire and could force the Fed to become even more aggressive in raising interest rates. It would not be a pretty picture for stock market investors.  
 
To be honest, no one knows whether Russia is bluffing or serious about invasion as a next step.  For me, a telltale sign of their intent would be any movement of medical facilities and supplies forward to the troop staging areas and border with Ukraine. This week, I have seen just that.
 
The risk is obvious. A shooting war would probably see the S&P 500 Index re-test the lows (4,222) of Jan. 24. Geopolitical events usually have a limited impact on the stock market, unless the hostilities are protracted and far-reaching.  If, on the other hand, a negotiated settlement was to occur, markets would likely fly higher. That "if" word is going to keep investors jumpy and prices in a box with every headline capable of moving markets 1-2 percent up or down.
 
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
 
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

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