They are just possibilities, but the concerns about them weigh on the markets.
Stock and bond markets in disarray
Long-term bond yields have fluctuated, suggesting that markets have little conviction about where the economy is headed.
If the Fed raises rates, it won’t take much for short-term rates to exceed long-term levels — which would bode another bad omen for the economy. Such juxtaposition of interest rates, also known as yield curve inversion, has often preceded recessions.
The broad stock market had one of its worst starts since 1900, data from Bloomberg shows. The markets fluctuate up and down. But this year, the S&P 500 is already down more than 10 percent from its peak, a decline known on Wall Street as a correction, while the Nasdaq composite is more than 20 percent below its November peak, pushing it into the place comes from what Wall Street calls bear market territory.
Commodity betting paid off. The iShares S&P GSCI Commodity-Index Trust, an exchange-traded fund that tracks a diversified group of commodities, is up 51 percent this year. Energy supplies have soared, but little else has done well.
For long-term investors with balanced, diversified portfolios that include stocks and bonds, such declines occur periodically. They can be painful, but if history echoes itself, the stock market will recover and surpass its past highs.
If the effective shutdown of Russian financial markets and rising commodity prices lead to a sharper decline in the stock market, or have other unexpected consequences, the Fed will struggle. It is moving towards tightening monetary conditions but may need to roll back and launch another bailout, such as in March 2020.
This is a risky moment, Liz Ann Sonders and Kevin Gordon of Charles Schwab said in a note Monday. It’s conceivable that the war could end abruptly and energy prices could plummet, but “betting on that in the short term seems like a fool’s errand.”
