WWIII looms, equities are getting clobbered, and investors are stacking up on cash. Cash redeployment will be a powerful force.
Key Takeaways:
- Stocks were priced for economic growth, high earnings, and free money. Instead, investors got war, surging inflation, and rising interest rates.
- Everyone is moving to cash, which just pushed the U.S. dollar to the highest level in years. The question is, where will investors redeploy that cash?
- Sergei Lavrov, Russia’s Foreign Minister, has been dropping warnings of nuclear war and prolonged conflict with the West.
“War Means War”
Let’s start with the bad news. This week, the internet echoed the frightening words of Sergei Lavrov, Russia’s Foreign Minister, who said the West “must not underestimate” the possibility of a world war. He said Russia was taking measures to avoid such a fate, but warned the West of drastic consequences if they continue supplying Kyiv with weapons.
According to Lavrov, the West is interfering with Moscow’s “special operation” in Ukraine, which seeks to protect the country from fascists. The rest of the world finds this story hard to believe. The horrifying stories coming from Ukraine will make it difficult for Lavrov to acquit his country of war crimes.
In his words: “NATO, in essence, is engaged in a war with Russia through a proxy and is arming that proxy. War means war.”
Giving up Gains
The S&P 500 dropped 8% this month. A drop below the March 8th floor would be a significant bearish signal, likely triggering more downside.
The NASDAQ 100, a leading index primarily composed of technology companies, did achieve a lower low on Tuesday this week. It sits more than 20% below its all-time high.
The technical patterns across all the major stock market indexes are looking particularly weak. Unless the economy takes a quick turn toward optimism, stocks might find their floors at much lower levels.
Priced to Perfection
When stocks were hitting all-time highs late last year, they were priced to perfection. Companies and investors were prepared for lower inflation, a resurgence of global trade, and the end of COVID-19. Instead, they got the complete opposite. Surging inflation, geopolitical tensions, tightening monetary policy, and an unbelievably persistent COVID virus make for a dismal outlook on economic growth.
Last year’s stock market valuations had pretty much ruled out the possibility of economic strife. They weren’t prepared for severe inflation, war, and monetary tightening, much less all three simultaneously. This month, company earnings started to reflect the damage.
Stocks enter bubble territory when they forget the possibility of a black swan event.
Gold Takes a Hit
Gold also had a tough week. It is down 2.5% from April 1st, although the price remains up 5% from the beginning of the year.
It is unlikely gold and stocks will remain correlated for very long. History tells us that investors stay away from speculative assets during times of stagflation. If the past few months are any indication of what is to come, the big winners will be precious metals and other assets that represent something real and tangible.
Rush to Cash
Judging by the recent strength in the U.S. dollar, people are jumping out of everything and into cash. The U.S. dollar currency index just briefly popped above its previous high in March of 2020. High demand for dollars boosts the strength of the dollar against other fiat currencies.
The dollar currency index is now sitting in a major resistance zone, which means we could be approaching a turning point. The question is, where will investors re-deploy their cash? Will they regain their appetite for risk, or turn toward safe havens?
Decelerating growth, high inflation, structural market risk, falling consumer confidence, and reduced confidence in central banking all point to gold as the ultimate beneficiary.
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As always, thank you so much for reading – and happy investing!
Additional Resources:
China’s Economic Slowdown Is Everybody’s Problem (Bloomberg)
Russia hits faraway targets; diplomat warns of risk of WWIII (AP News)
Russia’s Lavrov: Do not underestimate threat of nuclear war (Reuters)
Russia Warns of Nuclear War Risk as Ukraine Talks Go On (Bloomberg)
