@theMarket: Stocks Trapped in a Box / iBerkshires.com
By Bill SchmickChronicler of the iBerkshires
Over the next three weeks, stocks will likely trade in a wide range. The caveat to this forecast: if the Fed suddenly changes policy, or if a deadly war breaks out in Ukraine. Those are two big ifs. Unfortunately, I can’t predict when or what the next Fed chief will say, or predict Vladimir Putin’s next move.
The next meeting of the Federal Open Market Committee will take place in mid-March. The latest CPI and PPI inflation data show that inflation is accelerating at a much faster pace than economists and the Fed expected. It is almost certain, according to bond market vigilantes, that the Federal Reserve Bank will raise interest rates at that time. So, the only question is whether the rate hike will be 25 or 50 basis points.
This will only be part of the equation. Investors will expect Chairman Jerome Powell to give them more information on how many rate hikes they can expect in the future, and what other monetary tightening the Fed is also planning. The risk will be that the stock market fades and tests the lows if the Fed is seen to be more hawkish on tightening than expected.
That in the meantime, we have something to occupy our attention. This week, market concerns about interest rates were supplanted by Russia’s intentions towards Ukraine. So far, the conflict has played out in the media in a “he said, she said” war of accusations and counter-accusations.
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 United States and its allies are prepared to impose on Russia in response to perceived aggression would cause damage to the global economy and to the United States as well.
Russia supplies a large part of the products that the rest of the world consumes. The sanctions could immediately cause major price spikes for commodities such as oil, gas and coal. Russia is also a major exporter of rare earth minerals and heavy metals. A third of the world’s supply of palladium (used in catalytic converters), for example, and titanium (think airplanes) is also mined and exported by Russia.
Ukraine is also a major source of neon, an essential input in the manufacture of semiconductors. Ukraine is one of the world’s largest producers of wheat, as well as fertilizer (just like Russia). Hostilities could harm their ability to export or even harvest the country’s wheat supply.
I would expect price spikes in several food items as a result. This would add fuel to the inflation fire and could force the Fed to become even more aggressive in raising interest rates. That wouldn’t be a pretty picture for stock market investors.
To be honest, no one knows if Russia is bluffing or serious about the invasion as the next step. For me, a telltale sign of their intent would be any movement of medical facilities and supplies to troop assembly areas and the border with Ukraine. This week I saw exactly that.
The risk is obvious. A shooting war would likely see the S&P 500 index retest the January 24 lows (4,222). Geopolitical events generally have a limited impact on the stock market unless hostilities are prolonged and wide-ranging. If, on the other hand, a negotiated settlement were to take place, markets would likely soar higher. That “if” word will keep investors nervous and prices in a box with each security capable of driving the markets up or down 1-2%.