We interpret recent trading in U.S. equities to be pricing in an elevated chance of a recession within the next twelve months. We surmise that this view has taken hold of the markets as the markets seem to be assuming that the war will persist for quite some time. In its Financial Stability Report released this week, the Federal Reserve (Fed) voiced its concerns that diminished liquidity in financial markets has helped to make financial markets more volatile.

Since Russia’s invasion of Ukraine on February 24, potential variables affecting the real global economies as well as global financial markets continue to proliferate. Forecasting has become increasingly difficult as uncertainties increase.

We understand that many investors and analysts have become “comfortably numb” to the extent any narrative is constantly repeated, such as elevated inflation concerns, likelihood of a recession, supply chain issues, China lockdowns, repercussions from the war and related Russian sanctions, and a hawkish Fed. Every now and then, certain people are awakened from their “comfortably numb” state when they are “surprised.” Volatility can be expected to increase during such times.

We assume continued volatility across virtually all financial markets for at least as long as the war persists. Also, we continue to forecast higher interest rates as part of a volatile trajectory. We suppose that a well-diversified portfolio of selected high-quality stocks that includes some commodity exposure could be the best strategy for many long-term investors. Our preferred approach is to anticipate and recognize “tradable bottoms” in equity markets so that we might take advantage of attractive entry points to purchase selected equities.