Market Forecast For the Week of February 28, 2022: The Russian Bear Infiltrates Global Markets

FORECAST: The S&P 500 rallies to 4450 and stalls before beginning another leg lower towards a retest of last Thursday’s lows. Market optimism regarding Putin’s failure to gain concessions from Ukraine and his isolation from all of Europe and most of Eurasia will help the market rally early this week but the implications of Putin becoming unpredictable and irrational are more important to financial markets, and that will invigorate the bears and send markets significantly lower by week’s end.

My mistake in predicting Putin to be shrewd and rational is unfortunately being echoed by the foreign policy establishment, as Putin is now being publicly described as “off the rails.” There were no incentives to invade Ukraine and instead of skillfully distracting the West Putin has united not just NATO but non-NATO countries and even fellow strongmen in viewing Putin as a global liability. With winter ending in weeks there is the possibility of new EU policies toward reorienting energy supplies, power production and energy conservation which would remove the long-term threat of uncertain Russian energy supplies. The improvement in long-term confidence from such policy changes along with greater US-Europe unity is exactly what Putin and China fear, and this fear could make Putin even more irrational in the days ahead. The heroic ability of Ukraine to resist Russia has long-term moral consequences for the world but perversely it also means in the near-term Putin is likely to become frustrated and horrifyingly unpredictable.

Global investors have too little to offset this gargantuan negative and consequently markets are heading lower through March. Before Thursday confidence around the globe was founded on modest but persistent global growth and the hopes the Fed would come to its senses by mid-March and hike interest rates only 25bps. Now near-term global growth is at risk due to rising commodity costs and the prospect of European policy changes, and this will result in earnings revisions. And with China distracted by its own worries about an unhinged Putin there is a greater possibility of neglect or policy mistakes in easing the longstanding property crisis, which is critical to global investors because of contagion effects from global lending and investments in Chinese property. So while the Fed is more likely to go slow now due to geopolitical tensions, that is less important than earnings revisions and financial contagion since the markets are already at high valuations. A worse economic outlook combined with horrifying possibilities from Putin’s newfound irrationality guarantee the market will fall into bear market territory, bottoming around 3700 at best.

Financial risk is a significant concern as dollar shortages may emerge due to sanctions on Russia’s Central Bank and several commercial banks. And while China’s property crisis hasn’t triggered any fallout among global banks yet, cross-border bank claims to the non-financial private sector (e.g., real estate) are high according to the most recent BIS data. Talk of financial contagion is enough to thwart global investor confidence. And the global financial markets need the Chinese Communist Party to finesse the troubles at Evergrande et al, which the CCP is incentivized to do since Chinese retail investors have money at stake.

My current positions include a sizable cash position, Amgen (AMGN), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.