The good: Russia and Ukraine negotiate a truce

 

In this scenario, most commodities would likely come down in value, notably oil, which would likely drop back below $90. The Federal Reserve would only have to raise rates on the lower end of market expectations. Inflation would likely peak sometime this summer, and the market would probably jump 5% to 10% given current sentiment is extremely bearish. Inflation would still remain high in the short term, but there would likely be some relief further out. Growth stocks would most likely do well while stocks tied to commodities may experience a pullback.

 

THE BAD: our current situation stays the same

 

In this scenario, Russian commodities still find their way to the markets, albeit at a discounted rate and with significant delays. The market would likely trade lower or sideways. Commodities would continue to do well while stocks with higher multiples would likely trade a little lower. The S&P 500 and the NASDAQ Composite Index are down approximately 12% and 15% year-to-date so we don't think the downside would be significant from this point. However, there is risk that the inflation caused by rising commodity prices would force the Fed to raise interest rates high enough that could trigger a recession in sometime in 2022.

 

The ugly: the War intensifies and Russia-Ukraine supply chains Break Down

 

In this scenario, Russian sanctions would increase and commodities from both Russia and the Ukraine would not be marketable. Commodities would likely move significantly higher, which would create significant inflation, and the Federal Reserve would have to raise interest rates aggressively. All of these factors would increase the chances of the global recession in the coming months. Most stocks would trade lower. However, stocks tied to commodities may hold up better and potentially increase because of the rise in commodity prices, at least in the short term.

 

 

Regardless of which outcome is realized, a diversified portfolio is paramount in these types of markets. I can't stress enough how important it is that all the arrows in a portfolio don't point in the same direction (i.e. be uncorrelated). I would also like to note that this is not the first conflict that the market has had to go through. Eventually we will get through this and as history has shown us, the market will likely soar higher.

 

I've also included a piece from our CIBC Economics team entitled "Will the real real rate please stand up".

 

If you have any questions please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan