The headwinds that we discussed last quarter continue to pressure risk assets, but with even more force than we initially anticipated, as a result of several new developments:
1. Inflation pressures are not yet abating and even seem to be getting worse each month, souring consumers’ views of the future.
2. As a result, the U.S. Federal Reserve (Fed) and other central banks have turned very hawkish very quickly, and the usual fears about the start of a new tightening cycle are emerging – namely, that recession will likely be the result.
3. Russia’s invasion of Ukraine drove commodities even higher, while ushering in a new cold war and nuclear fears not known since the Cuban missile crisis.
4. And of course, just as investors were ready to forget COVID, a new surge in Hong Kong that spilled into China is now threatening over a billion people with the prospect of mass infection or countrywide lockdowns.
However, we expect these headwinds to continue into the summer months before beginning to dissipate, and then eventually yielding to tailwinds that could drive the next upward move for stock markets.
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