Will The War End this Economic and Market Cycle Suddenly ?

15% Equity Market Correction Takes A Bite Out of Investor Wealth and Confidence!

March 9, 2022

By Mitchell Anthony



This economic cycle has been wrought with problems.  At the top of the list are consumption and consumer confidence issues which have been dealt with through easy monetary policy and fiscal stimulus. However the solutions had collateral damage and we now have entrenched inflation, a consumer that spends with unbridled optimism, and asset bubbles in real estate and financial assets. Now to add insult to injury we have a wild man at the helm of a nuclear enabled superpower that is acting reckless and has declared war on the Ukraine.  Historically war has destroyed consumer confidence and pushed the economy into recession quickly.  However this war is like none other and the world has to fight Mr. Putin with economic warfare rather than military warfare. This has only exacerbated our problem with inflation because it has been rooted in capacity problems for raw materials of all types and now we add to it things produced by Russia and the Ukraine like oil, natural gas, and some agriculture like wheat.  This war will undoubtedly effect consumer confidence along with the higher price of gasoline and soften the demand side of inflation. However the US consumer is not entirely rational and the central bank and Congress left the punch bowl out far too long and the US consumer is addicted to free money and has bankrolled much of it for continued use and spends recklessly as a result.  Hopefully a more sober price conscious consumer will emerge?


  • Ukraine submits to Russian ultimatums or Russia Takes control of Ukraine and initiates their agenda for the Ukraine.
    • Global Response is unknown and hard to predict!
      • Russia becomes isolated and unable to sell a small portion of their Oil and Gas.
      • Increased production and sales by OPEC to China and Europe might help compliance with Western orders for isolation and might even start a price war leading to lower prices providing welcome relief!
      • Russia experiences long term removal from Global financial system (swift).


Equity markets generally don’t do well in the period leading up to an invasion or a short war as we learned from past experiences in the Middle East.  Generally once the invasion and or short war ends the markets recover quickly.  However this cycle is quite different and the war may be long and fought economically creating entrenched inflation along with very low consumer confidence.  A stag-flationary environment may well be the most probable event on the horizon.   Equities performed very well during periods of slow growth and stable low interest rates.  However equities perform poorly during periods of negative growth and sharply rising rates or sharply falling rates.   The equity market has already fallen 15% as it has discounted in the possibility of much higher rates or much lower rates with a deep long lasting recession.

The current outlook for equities hinges heavily upon whether Treasuries become an attractive investment to challenge equities. There are a few scenarios to consider.

Scenario Number 1 – Deep Long-Lasting Recession that comes on Quickly – 25% Probability.   Money leaves equities and moves to treasuries as we suddenly lose consumer confidence and retail sales and consumption plunge.

The economy as a result falls into a deep recession within several months and rates fall into negative territory. Our visibility to forecast whether this recession will be deep and long-lasting is challenging.  Generally to envision successfully such an event we would need to have rot in the financial system that will take time to clean up.  This simply isn’t the case currently.  However if the conflict were to extend beyond the Ukraine then this would be a game changing event further destroying confidence.

In this scenario the Negative growth and the high total return on treasuries draws more money out of stocks and into bonds.

Scenario Number 2: Sticky inflation and elevated prices – 40% Probability.   Moderate growth and high and still rising prices coming from production capacity problems,  economic war with Putin,  and elevated demand from irrational US consumer spending, all collectively force fed to act strongly with rate increases.

Inflation has been sticky and seemingly unable to resolve on its own. Wage Inflation still propped up from a strong economy and overstimulated consumers. Consumers have had unbridled optimism and spend and consume housing and durable goods without regard to value. Commodity prices have become unhinged as investors extrapolate current trends.

  • Crude Oil currently over 120/barrel with Russian Oil under siege
  • US and UK embargo Russian Oil requiring almost 1 million barrels a day from other producers.
  • Agricultural commodities dragged higher as Wheat embraces real supply problems due to war.
  • Construction Materials still near highs as housing demand has not yet cooled.

Cost Push inflation climbs a bit further – Inflation picture gets further out of balance with regard to production of Key Commodities like Oil and Agriculture.  This leads to substantial Fed intervention pushing fed funds to 3% or more and mortgage rates to 5%.   Secular growth names under-perform and treasuries, energy, and commodity stocks outperform. Cyclical stocks will do well for a while but then ultimately fall when a mild to moderate recession of some sort unfolds within a year.

Scenario Number 3:  GOLDILOCKS!  Inflation subsides on its own due to increased capacity for raw materials and durable goods – 35% Probability.  Putin achieves his goals in the Ukraine and the world looks away from his misbehavior and allows him to export oil and other commodities.   Interest rates remain flat to lower with growth staying slightly positive. This is the ideal environment and creates a Soft landing for the economy.  Equity markets move higher and recover all that has been lost as the war and inflation move to the back burner.

Scenarios two and three seem to be the most probable but only with slightly higher probabilities than scenario number one as noted above.  Scenarios one and two would likely lead to a further decline in equities of 10% or more and would require a shift in our Asset allocation to maximize returns as these play out.  Scenario #3 would lead to new highs for equities and secular growth names.

We remain cautiously optimistic.