This article was penned by CAPIS

CAPIS held its March research call, featuring Nicholas Colas and Jessica Rabe, Co-Founders of DataTrek Research. DataTrek is a New York-based independent research advisory service providing unbiased data analysis, helping investors make the investment process more profitable, robust, and efficient.

Click here for a video of the research call

Colas and Rabe’s presentation addressed the following topics:

Russia/Ukraine Crisis Will Not Result in WWIII

• Colas opened with a statistic citing the VIX stands at 27 now, higher than in previous rising rate environments due to the conflict in Europe. The Federal Reserve since 1990 has never begun raising rates when the VIX was over 22. (3:37)
• Equities are certainly more volatile now but that is due to the confluence of rising oil prices, the Russia/Ukraine conflict, higher inflation overall and China. (5:05)
• We are currently in an economic environment dominated by uncertainty. (5:15)
• Despite the negative humanitarian effects of the current Russia/Ukraine, the stock markets don’t believe there will be a “WWW III-type” event and this crisis is not existential and can be resolved. (6:18)

Europe not the U.S. Faces Real Risk of Recession

• Colas said that economic slowdowns could hit globally, Europe faces the “real risk” of recession this year. Steep oil prices and a drop in consumer confidence there are indicating a recession in Q2 or Q3. European stocks are already priced for such an event. (7:12)
• In the U.S., markets feel inflation is manageable and addressable issue – as the FOMC has laid out its interest rate policy for the next year – equities remain a “buy” amid caution signals. Investors should buy stocks at key VIX levels – 36, 44 and 52. (9:18)
• Oil price levels overshadow consumer’s discomfort with the speed in price changes. The hyper-rapid pace of change in prices bears scrutiny and worries people, not per barrel cost. If oil hits a 90% change in price year-over-year or $124/bbl then the U.S. has breached a historical recession threshold. (10:06)
• The Federal Reserve’s public announcement of 25 basis point increases throughout 2022 – a steady cadence – has reassured the market. The May or June FOMC meetings could bring larger and immediate 50 basis point increases. (12:04)
• The Treasury 2/10s spread, a key recession indicator, at 23 basis points is quite narrow and foreshadows rising 10-year yields. If the 2/10s spread doesn’t widen and the 10-year yield doesn’t settle in the 2% to 3% range, then the FOMC could be forced to take more aggressive monetary policy actions. (13:45)

Two Great Tastes that Don’t Go Great Together – Volatility and Elections

• After a rough January for the S&P500, the market could face subpar returns for the rest of the year. Add to this that the S&P 500 might not have bottomed yet and the index could post a negative return for the year. Caution is advised for those investing in equities. Expect more volatile markets moving ahead. (16:10)
• S. mid term elections are only 232 days away (as of publishing) and every seat in the House of Representatives is up for grabs. President Biden’s approval rating (41%) could lead to a big loss of seats in the House with oddsmakers saying there’s an 85% chance the Republican win back control. A similar situation is brewing in the Senate as odds show Republicans have a 77% chance of winning control. (22:05)
• Should the Republicans win control of both chambers, expect political gridlock. (26:25)

For questions or to learn more about CAPIS, please reach out to [email protected] and follow us on Twitter (@capisinc) and LinkedIn for more updates and insight from our team.