99 Problems
I went on vacation, and so much happened in markets that I feel like I’ve been gone for six months. As of close on Feb 22, the S&P 500 was officially in correction territory (drawdown of 10% or more) since its most recent high on Jan 3. That’s the first technical correction since the pandemic fall of March 2020.
Let’s take a minute to look at the new obstacles in our path, review the existing ones, and make sense of how we got here. I know listing off all 99 of our problems doesn’t sound uplifting, but it might help to put them in bite-size pieces so the view isn’t so overwhelmingly negative.
Cleanin’ Out My Closet
The newest obstacle to clean out, and the most popular headline, is the quaking geopolitical landscape between Russia and Ukraine. The sheer size of these two countries by population, land mass, and influence over the world’s energy supply makes the situation feel more dire. Especially at a time when oil prices have already raised some eyebrows (see my column from Feb 10, “The Betting Line on Oil”).
The aggressive stance Russia appears to be poised for makes this even more anxiety-inducing as we hear the word “war” floating around. Market anxiety can be found in the outflows from broad risk-on ETFs such as SPY (S&P 500), QQQ (Nasdaq 100), and IWM (Russell 2000), and the fact that the U.S. yield curve has flattened tremendously. The spread between 2-year Treasuries and 10-year Treasuries is down to 38 basis points — its lowest level since spring 2020.
There’s a chance that the conflict between Russia and Ukraine escalates and causes more widespread instability — particularly if Russia takes a more invasive approach and the West responds with tougher sanctions. That could ripple through commodities markets and threaten growth both here and abroad.
There’s also a chance that the moves by Russia are less aggressive, are met with incremental sanctions from the West, and a more negotiated outcome can be reached without the threat of a major geopolitical event. Russian markets would still be affected, but this outcome would keep the pain relatively contained. A strongly unified West gives this outcome a better chance and is the one I think we’re all hoping for.
The silver lining to this is that following spikes in global policy uncertainty, stock markets have seen increasingly positive results 3-, 6-, and 12-months after the spike. All the more reason not to let fear take over and sell into a downturn.
Hot In Here
Still humming in the background are hot inflation prints (both on consumer prices and producer prices), and a Fed meeting that is now looming large as we approach March.
A statement that seemed outrageous and absurd last fall now seems much more plausible: “the first hike could be 50 basis points.”
I’m no Fed Governor and I don’t have a vote, but I think 50 basis points could be an effective approach. If the big risk here is that the Fed has lost control of inflation, maybe taking a bigger hammer to it at the start is a better way to control that narrative. After all, markets trade on narratives more often than not.
Either way, this March meeting is perhaps the most important message we’ll hear from the Fed since March 2020. I’m expecting, like most highly anticipated events, that the anticipation will be worse torture than the actual message.
Until that point though, I anticipate the whipsaw in growth stocks to continue, and will sit on the Nasdaq sidelines until we are decently past the first hike.
The Next Episode
We are now squarely in the next episode of this economic cycle. This episode is full of tests, re-tests, and re-ratings. We’re trying to strike a balance between letting things heat up, but not catch fire. This is a time when investors earn their chops. There is so much to learn in periods when surprises come fast and furious. We may have 99 problems, but boredom ain’t one.
Want more insights from Liz? The Important Part: Investing With Liz Young, a new podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.
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