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The Ukrainian excuse

Markets can digest geopolitical risks: Syria, Hong Kong, Iran, Brexit etc. demonstrate this.

Is Ukraine an exemption? Undeniably, higher gas and oil costs portend substantial repercussions for policymakers, central bankers, and consumers but still, it doesn’t seem to be the major market influencer.

The major argument for the disappointing equity market performance is an after bubble valuation bursting (similar to 2000) coupled with rates hiking from behind-the-curve central banks (similar to 2016). The blowout of multiples is underway not only in the ‘frothy’ part of the market (high tech stocks, cryptos, ARKKs) but everywhere: 50% of SP500 stocks are down more than one third, one out of three NASDAQ100 is at least 30% down from their peak, whilst European indices are practically flat on a 12m basis; so -the argument goes- a ‘silent’ bear market is developing beneath the surface, and it remains to be seen if the crowded ‘value’ trades (financial, materials, energy) will save the day.

Not so fast. After its January 24th intraday lows (2,225), the S&P 500 has assimilated a series of beatings with extreme composure and resilience: two additional interest rates hikes, disappointed EPS guidances (Meta etc), Ukraine etc. Furthermore, fund managers’ exposures to equities are at the 2020 pandemic level, the bull/bear ratios extracted from the options’ market, are in the 2016 lows.

But the S&P 500 has not revisited its lows; it would be surprising to end the year with this negative performance unless a recession hits the economy and corporate earnings; otherwise, substantial equity returns will occur during the coming months.

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