When—and how—will Russia’s horrid Ukraine invasion end? How nosebleed high will gas prices climb? Are food prices next? And food shortages? Will China’s renewed lockdowns further gum up already sticky supply chains? What about interest rates ratcheting from Fed tightening? Or America’s wacky midterm election campaigning? Early 2022 ushered in seemingly ubiquitous uncertainty—which stocks famously hate. But don’t despair. The first-quarter fog—now widely pre-priced into stocks—will lift. Don’t fear today’s uncertainty—embrace it. Buy before the clearing haze sends stocks soaring.
The old adage that stocks hate uncertainty is true—but only partially. Stocks hate high and rising uncertainty. High but falling uncertainty, however, is the absolutely best stock market fuel anyone could ever ask for. And that is dead ahead now.
Take Russia’s tragic Ukrainian invasion and the West’s response. It amplified early choppiness but doesn’t change my January 13th forecast here of a volatile first half followed by a big second-half relief rally. No, I didn’t forecast the war nor envision the straight slide down to February 24th. Yes, the path of war ahead remains unknown. But clarity is emerging regarding coldhearted markets’ chief concern: energy. Hence oil is nearly -25% off March’s peak and European natural gas has more than halved.
Markets have priced America’s and the UK’s mostly symbolic, economically meager Russian oil bans, too. There is some clarity there! They see China, India and others snapping up cheap Russian crude at big discounts—cut rate to countries ready to trade with pariahs like Putin’s Plutogarchs, but that supply isn’t off the market. More clarity! They know Putin isn’t stanching energy shipments to punish foes—no surprise given those revenues comprise over a third of Russia’s budget. You guessed it—even more clarity.
Yes, some energy uncertainty remains. Talk lingers of far more significant bans in Russia-reliant Europe. But Germany and others’ opposition to oil and gas embargos offers important information, letting markets more easily pre-price probability of the “big ban theory.” With current talk solely coal focused and the can kicked down the road to August—and with coal powering only a tenth of Europe’s energy—that probability looks low. Regardless, every step forward reduces uncertainty, draining far-flung, worst-case scare stories’ power. Soon fuel prices will either be lower—or markets will have acclimated to them being high … and moved on.
Other uncertainty expiration dates approach, too. I told you January 28th, Fed rate hikes wouldn’t boost long rates nearly as much as folks widely fear. With one hike already done, more seemingly close and “quantitative tightening”—the Fed reducing its huge bond portfolio—possibly starting in May, we should soon see the effects. Either way, whether I’m right or wrong, or you are, uncertainty will fall soon in a world where stocks look beyond the news to the future for pricing.
China’s COVID lockdowns? They are unpredictable. But their economic impact is relatively predictable now. Markets learned fast in 2020 and now know well that temporary shutdowns’ sharp slowdowns reverse fast when restrictions lift.
Another huge uncertainty domino set to fall: midterms. Shrill campaign rhetoric always spikes unease early in midterm years, weighing on stocks. Will congressional bozos really go after oil profits to punish them for high gas prices? Will Billionaires be banished in America as if Putin’s puppy dogs? Will Kyrsten Sinema prevail on Dancing with the Stars? Eek!
This year, campaign pledges will be ultra-extreme and the shrieking ultra-shrill. Why? Both parties used the decennial Congressional redistricting to solidify existing advantages, meaning many incumbents’ biggest challenges will come from within. That spurs a “Race for the Base,” with Republicans and Democrats alike eschewing moderation for dyed-in-the-wool party polemics, posturing, and trotting forth proposed legislation that has as much chance of prevailing as I would on Dancing with the Stars (LOL).
But the long-awaited redistricting results also kicked off clarity’s climb, narrowing the focus to a small number of contested races. Now markets can pre-price probable outcomes. The president’s party almost always loses seats in midterms—so President Biden’s Democrats likely lose one or perhaps both Congressional chambers creating partisan hardcore gridlock!
Politically for stocks, hard and fast gridlock is the ultimate uncertainty remedy. It renders governments incapable of passing any big controversial legislation. Big bills often create winners and losers, spooking investors because—as behavioral psychology documents—people hate risk of losses much more than they love potential for gains. Gridlocked governments also let businesses better plan for the future. Knowing the rules are unlikely to change, they grow more comfortable deploying capital to spur future growth. Investors do, too. Stocks love it.
Political biases blind most to midterms’ gridlock market magic. But as I wrote in January, the reality should dawn fully on investors sometime in 2022’s back half, with plunging legislative uncertainty turbocharging stocks. The fourth quarter of mid-term election years has been positive 88% of all S&P 500 instances. Well-known, pre-priced headwinds—inflation, Ukraine, COVID shutdowns—lack sufficient surprise power to prevent it.
Global stocks’ rebound since early March may already reflect shrinking uncertainty. But more short-term, wild wiggles could remain. Don’t let them sway you. Trying to time markets’ short-term swings is folly. In my 50th year managing money professionally I’ve never seen anyone do it consistently. You don’t need to. Through this Q1, the S&P 500 returned more than 9% annualized over the past 20 years—a 487% total return that includes three stomach-churning bear markets, many corrections and scores of mini-dips. Preternatural timing isn’t a prerequisite for meeting your financial goals. But selling low and missing out on stocks’ big rebounds is a prime and evil way to fall short of them. Maybe this is a V-shaped correction and we saw the bottom a month ago. Maybe it is a W-shaped one with the low still ahead. Maybe not. About a third of all corrections in history have been roughly W-shaped. But, either way, corrections lead to higher prices looking a year out.
Relief is coming. Meanwhile, remember the age-old saying: “If you want clarity, the stock market is a very expensive place to get it.” This one, too: “Sell on the fear, buy on the news,” because by then markets have priced in the worry—just look at global markets being nicely higher now than the day Russia invaded Ukraine. Once certainty or even increased clarity arrives, stocks are routinely far higher than when frustratingly foggy futures reigned. That makes those who buy during the haziness doubly happy when it clears. Hazy makes happy.
