The Ukraine war, fallout from sanctions, hawkish sentiment among global central banks and gyrations in commodity markets add layers of uncertainty to what was already an uncertain environment for financial markets.

In this setting, forecasts are, at best, conditional and rest on a foundation of radical uncertainty (see article “Stuff Happens”). While we can quantify risk (i.e., options price implied volatility) and then assign probabilities (i.e., trading ranges) using statistical analysis, uncertainty, defined as ‘unknowable unknowns’, cannot be measured. That fact severely limits our confidence in evaluating potential outcomes and appropriate investment strategies.

Investopedia characterizes stagflation as a period of slow economic growth (declining GDP) and relatively high unemployment — economic stagnation — accompanied by rising prices – inflation.

There are many third-world examples that lay bare the economic death spiral associated with stagflation. Lebanon and Venezuela come to mind, and heavily-sanctioned Russia will not be far behind.

On February 24th, 2022, Russia invaded Ukraine. It was an unprovoked invasion orchestrated by a bellicose dictator who wanted to decapitate an emerging democracy. It is the standard playbook for frightened Dictators ruling a disenfranchised population. You cannot have ordinary Russians questioning whether the Ukrainian experiment with capitalism is a better model than a Soviet style autocracy?

The “picture-is-worth-1,000-words” metaphor is well-suited to illustrate the performance of financial markets during January 2022. Early declines, most notably within the tech heavy Nasdaq 100 index, were followed by sharp rallies, described by pundits as take your pick: a reversion to the mean or a bull fake out. The late-stage rally in the Nasdaq prevented it from recording the worst January in its history.

In chaos theory, the butterfly effect refers to how minor changes in an initial assumption can alter the future in unimaginable ways. It was based on the work of mathematician and meteorologist Edward Lorenz who used the example of a tornado being influenced by minor perturbations such as a distant butterfly flapping its wings weeks earlier.

OMICRON: VARIANT OF CONCERN?

Is it an ominous sign that social media posts focused more on the process for naming the latest iteration of COVID, than it did debating the risks associated with the transformative mutations unique to Omicron?

The World Health Organization (WHO) classifies COVID variants with letters from the Greek alphabet in much the same way as we categorize hurricanes alphabetically. The idea is to provide the general population with a down-to-earth classification that simplifies the scientific designation and removes any stigma caused by referencing variants using the location where they were detected.

Are we to assume from Facebook’s name change that Mark Zuckerberg is embracing a corporate transformation? Or could it be an attempt to shift attention away from mounting regulatory headwinds? Perhaps, it is a bit of both.

Whatever the reason, Meta Platforms Inc. (Facebook’s new name) reflects the company’s growing ambitions beyond social media. To that end, the company is setting in motion a ten-year US $10 billion spending initiative to ensure that its platform and more than two billion daily active users will be the central player in the next iteration of the Internet… the “Metaverse.”

The latest Canadian data suggests that inflation, on a month-over-month basis, may be abating. Could it be that central bankers are right in the assertion that inflation is transitory? To address concerns that central banks may be ‘behind the curve’, let’s not forget that they employ some of the brightest economists who are constantly sifting through myriad data.

A central theme in portfolio management is risk-adjusted return. Weighing potential upside performance against downside variability is the essential element in setting an appropriate asset mix.

Conventional wisdom tells us that healthy bull markets climb a wall of worry. Ascending to new heights by scaling an abundance of negative factors that are seen as temporary stumbling blocks rather than permanent impediments.

In the current environment, there are plenty of “temporary” stumbling blocks for the bull to scale; the taper timeline, direction of interest rates, elevated valuations, irrational exuberance in sectors (meme stocks), Covid trends, vaccine uptake, inflation, supply chain disruptions, labor shortages, government debt… and the list goes on.