Got volatility? You bet. The DJIA can rise or fall by 800 points in a day. What’s going on? Millions of large and small investors are buying and selling, attempting to discount, or price in, future events. This occurs in ‘normal’ and ‘not-so-normal’ times.
But even in normal times, uncertainty is always present. No one knows the future with certainty. Do you have a crystal ball? I didn’t think so.
What might happen to bond yields, corporate profits, economic growth, inflation, and more?
Today, the economy is on solid footing. Consumer balance sheets are strong, jobs are being created, and the economy is expanding. However, the markets are facing huge headwinds: rising inflation, a more hawkish sounding Fed, and the Russian invasion of Ukraine.
Russia’s invasion has injected an enormous amount of short-term uncertainty into markets.
For example, how do investors price oil? Well, what’s going to happen to Russian oil exports?
The U.S. is looking to ban Russian oil imports, but Europe has been reluctant. Yet, banks don’t want to finance shipments, and dock workers aren’t unloading the crude.
How long might this last? How do investors price oil in such an unstable environment? It’s why we are seeing huge swings in crude.
Eventually, we might expect investors to gather around some version of a new normal. I guess in some respects, a roughly 10% drop in the S&P 500 suggests an incredible amount of resilience. Think about it: inflation is soaring, uncertainty is the rule, the Fed will be raising rates, and markets are down modestly.