The invasion of Ukraine caught the stock market at a vulnerable time. Here’s why the timing couldn’t have been worse for investors.

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Above all, it generates more uncertainty, which can be a crippling force for markets and investors.

Rising inflation may be good for the economy and consumers up to a point, but a 7.5% jump in the consumer price index in January was well above the average target only 2% of the Federal Reserve. One consequence of constantly rising prices is that the Fed will have to tighten monetary policy in an attempt to bring the economy under control and bring inflation under control.

Initially, the Fed viewed the price hike as transitory, blaming it on temporary supply chain disruptions that would likely resolve on their own and lead to price normalization. But as supply chain issues persisted, particularly in the semiconductor industry, consumer demand for goods remained incredibly high.

The resilience of the US consumer, combined with longer-than-expected supply chain disruptions, led the Fed to abandon its “transitional” view of higher prices and adopt a position that it must raise interest rates. interest much faster than originally expected.

And that’s bad news for risky assets, like stocks, which have been conditioned on expecting accommodative monetary policy from the Fed since the aftermath of the Great Financial Crisis of 2008.

In fact, since the Fed took a more hawkish stance in December, the stock market has trended lower after nearly two years of strong gains. The SP 500 is down more than 10% from its record high before the Russian attack as investors grow increasingly nervous over an expected interest rate hike at the Fed meeting next month .

Investor disappointment in recent weeks has only worsened earnings results, which, while generally positive, were not enough to beat analysts’ expectations. Combined with strong comparables from a year ago and heightened investor expectations, small earnings losses from fast-growing companies such as Meta Platforms, Roku and PayPal drove the stock price down more than 20%. their actions in a single day.

When you add it all up, you get a period of heightened uncertainty for the stock market and investors. And the risk is still ahead, as commodity prices continue to soar after Russia’s attack on Ukraine, only exacerbating inflationary pressures and the likelihood that the Fed will have to seriously raise interest rates. interest in trying to control rising prices.

But in the long run, the stock market has a way of overcoming uncertainty and climbing the proverbial “wall of worry,” as long as companies can keep growing earnings.

“While these headwinds are creating short-term uncertainty, these are expected to largely dissipate/fade before the first half of 2022. And so, the setup remains that we see stocks as treacherous in the 1H but stronger in the 2H “Fundstrat’s Tom Lee said in a Wednesday note.

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