A Long, Potentially Pain-Filled Summer Lies Ahead

The markets have stabilized a bit and have risen somewhat so far here in May after they were absolutely shellacked in April. I don't see this as the start of larger rebound off oversold levels but more of a relief rally at this moment. There are myriad worries for investors this spring. The two biggest concerns I have about equities are likely to become worse before they get better and are why I think investors have a long few months ahead of them. My first big concern involves Ukraine. It is breathtaking how our foreign policy establishment, backed by both sides of the aisle, has turned this conflict into a full-scale proxy war with Russia. While Putin's barbarous actions cannot be excused in any way, shape or form, I see our response as ill-thought-out, especially when it comes to the risks of the approach. Escalation with a nuclear-armed adversary could have unintended and potentially horrific consequences. No party it seems has any interest in finding an off ramp at the moment. The economic impacts of the war in Ukraine don't appear to be taken as seriously as they should by most people, either. Both Russia and Ukraine are huge exporters of staples such as wheat. More importantly, they are two of the biggest exporters of phosphates, nitrogen, fertilizer and nutrients that are vital to the growth of core food crops such as corn. Soaring prices for these necessities are already causing farmers across the globe to cut back on their use, resulting in lower crop yields to come. This reduced output will have negative impacts up and down the food chain, including on meat and poultry prices, and will produce substantial food insecurity in much of the third world. You think your grocery prices are high now? Talk to me in September. As shortsighted as I think our so-called foreign policy experts are, they possibly pale in comparison to the mandarins over at the Federal Reserve. It is obvious at this point that the central bank is way behind the eight ball. Monetary tightening should have begun in the back half of 2021, when it was obvious prices were surging, in order to negate the impact of the profligate spending by Congress. Instead, our central bank decided to wait until our economy was clearly slowing and in a big way. The initial reading of first-quarter GDP was negative and less than 2% growth is expected in the second quarter -- a projection that likely will come down over the coming weeks. With an interest rate hike of 50 basis points and possibly 75 basis points this week, a similar move in June and smaller hikes projected for the rest of the year, it is hard to see how this effort to rein in inflation is accomplished without tanking the economy. The only question is whether the Fed blinks, resulting in continuing stagflation, or whether it follows through with its rate hikes and puts the economy in a significant recession. Under either scenario, price-to-earnings (P/E) multiples are likely to shrink further. For these reasons, I remain abundantly cautious on the markets. I have taken profits on some short-term trades on the move higher in May and my cash allocation remains high. At some point, there will be opportunities to buy the pullback in stocks so far in 2022 with conviction. However, we may need to get through a long, hot summer before that opportunity presents itself.

A Long, Potentially Pain-Filled Summer Lies Ahead

The impact of the war in Ukraine on food supplies and the effect of Fed rate hikes on the pace of the economy are big concerns moving forward.

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