• China’s stock market had its most volatile week in decades. Following a Covid lockdown for 40 million people in and around Shenzhen and reports of record Covid deaths in Hong Kong, China’s internet index crumpled down 8.1% Tuesday, erasing its gains back to 2013. A massive reversal began at 1:16pm on Wednesday when the State Council’s committee, chaired by Xi Jinping’s right-hand adviser Vice Premier Liu He, issued five supportive tech and market policies. In response, the Hang Seng Tech index closed up 22% and the Nasdaq Golden Dragon index jumped 33%, both one-day records.

• European markets closed higher this week, fully recouping losses from Russia’s invasion of Ukraine, despite data showing that the EU is likely to suffer energy shortages into 2024. Ukraine undertook effective military counteroffensive measures that portend a more protracted conflict, even as a military stalemate might aid a negotiated peace.

• In the US, the Federal Reserve raised interest rates by 0.25% for the first time since 2018, the initial salvo of six projected hikes through 2022. After two weeks of losses, US stocks appeared to shrug off the news. The Fed’s goal of tightening financial conditions without provoking a recession is worthy, but bond market action suggests this will not be easy. The spread between the 2-year and 10-year Treasury yields, a leading indicator of future recessions, is very close to inverting.

• For all of this, global equities ended the week trading higher than they were the night before Russia’s incursion into Ukraine.

Where from here?

• The likelihood of slower global GDP growth is high. While the US may remain a relative bright spot, China and the EU are under more significant and immediate pressure. China will do more to address its slowdown with future easing steps. However, Covid in China remains a much larger near-term challenge than in most other regions.

• In our view, the Fed cannot directly address the root causes of present inflation. Prior to the conflict in Ukraine – which has severely impacted global trade – supply/demand rebalancing was already beginning to point to a slower path for inflation in 2022. Now, the tightening of both fiscal and monetary policies in the US to fight inflation will gradually increase recession risks. Supply increases (and the absence of fiscal stimulus) will do far more to help achieve supply/demand balance over time than the Fed can.

• War risks remain highly elevated. In the event Russia changes tactics or impacts NATO countries directly, scenarios worse than a military stalemate and peace agreement remain distinctly possible the full scope of the Russia/Ukraine conflict is as of yet unknown. We believe markets can rally sustainably as clarity improves.

• We believe the investment environment calls for higher quality, lower cyclicality in equity and bond portfolios, with the exception of commodities that will replace Russian supplies. Our existing equity overweights remain industry-leading dividend growers. Sector overweights include pharmaceuticals and staples, with thematic holdings in cybersecurity, fintech and payments.

• Only a strong, positive supply-side response can curb inflation while allowing economic growth to continue. We believe the investment environment calls for higher quality, lower cyclicality in equity and bond portfolios with the exception of commodities that will replace Russian supplies. We are against market timing and for reallocating to these trends in the aftermath of a lingering, war-related supply shock.