March Outlook: Cold War 2.0 – Bear Lurks – Midterm Bottom Nears
By: Jeffrey A. Hirsch & Christopher Mistal
February 24, 2022
Despite all the warnings and rhetoric from US et al and Putin’s own words the world still seemed unprepared and shocked by Russia’s full-scale invasion of Ukraine that got officially underway at dawn local time February 24, 2022, with the brazen, matter-of-fact speech by Russian leader Vladimir Putin in no uncertain terms threatening the west with historic wrath should they interfere. 
Under the auspices of protecting the breakaway regions and his disdain for NATO’s continued eastward expansion toward his borders he launched his gambit to take over Ukraine as he made the case that Ukraine is rightfully and historically for centuries been part of Russia. The US was not too thrilled with Russian Missiles in Cuba in October 1962, which at the height of the Cold War set off the Cuban missile crisis.
In the table below we compiled the relevant historical geopolitical events that had an impact on energy prices and/or sovereign boundaries. As you can see the longer more drawn-out crises were accompanied by weaker markets. Arguably back in 2014 Putin stopped in Crimea due to plunging oil prices hurting his coffers. Our guess is he will use the same playbook or similar for the rest of Ukraine and eventually kick out the pro-western government and hold some kind of election to install and establish a new pro-Russian government.
[Crises Table]
It looks likely Russia will take over all or most of Ukraine. There will be resistance, but Ukraine’s military is no match for Russia and there is not much the west can do about it either on the ground or militarily. We just don’t have the stomach or bandwidth for it. Sure, we will battle him on the economic front with sanctions and with cyber as well as support for Ukraine and NATO, but Russia has prepared for this and has withstood it before for decades during the Cold War. 
We are likely looking at sanctions on Russia for many years. He has been preparing for this for years and in earnest when he ramped up his rhetoric six months ago in his notorious essay. He does not need the west now and it looks like China has clearly approved this action by the recent friendly summits and likely has his back. Putin has been selling dollars and amassing gold in preparation for this and has benefited greatly from the rise in oil prices.
Midterm Bottom Nears
However, the market showed some impressive resilience to this invasion with the big rebound today. As we have been warning all year long this is typical midterm election action for a new president where foreign adversaries take advantage of new administration weakness and unpreparedness. 
Unfortunately, our worst-case scenario has now come into play. But on the positive side it looks like the midterm bottom is nearing. When we made our 2022 Annual Forecast this past December prospects for a full-scale Russian invasion of Ukraine were low. For now, expect volatility to continue through Q2 and Q3 as the market seeks support, digests the developments in Ukraine, elsewhere in the geopolitical arena and on the Fed/inflation front. We still expect the Q4 rally illustrated in our updated chart here of the S&P 500 Midterm Election Year Seasonal Pattern to materialize as we approach the midterm elections in the late summer or early fall.
[Midterm Year Chart]
Pulse of the Market
Historically, February has been a better month in midterm years. For numerous reasons that has not been the situation this year. As of today’s close DJIA is down 8.6% year-to-date. Early February strength was quickly reversed by the beating of Russian war drums and DJIA promptly retreated back below its 200-day moving average (1). The failed early-February rally is confirmed by negative readings from both the faster and slower moving MACD indicators (2) applied to DJIA.
Dow Jones Industrials & MACD Chart
DJIA (3), S&P 500 (4), and NASDAQ (5) have all declined in five of the last seven weeks since the start of the year. So far this year, DJIA has logged four Down Friday/Down Monday (DF/DM) occurrences with two landing in January and two more during the last two weeks. Historically, DF/DM occurrences have frequently been ominous warnings especially when closely grouped together. Thus far this has been the case this year.
NYSE Weekly Advancers and Weekly Decliners (6) have been consistent with the market’s overall move. Decliners have outnumbered Advancers during losing weeks while the opposite occurred in advancing weeks. The lone exception to this was the last week of January when DJIA, S&P 500 and NASDAQ all logged a modest weekly advance even as Weekly Decliners outnumbered Weekly Advancers by about 2-to-1. Despite the accumulating market losses, the Weekly Advance/Decline numbers have yet to approach the extreme one-sided spike in Decliners last seen at the March 2020 lows when Weekly Advancers fell to less than 100.
With all the weakness this year, Weekly New Highs (7) have remained subdued. New Lows however have been on the move but have only exceeded 1000 during the final week of January. Today’s early morning sell off is likely to elevate this week’s reading of New Lows. Once again looking back to the last major market bottom in March of 2020, Weekly New Lows exceeded 2500 for two weeks then. 
Yields for the 90-day and 30-year Treasury had been steadily climber higher (8) in anticipation of Fed rate hikes coming sooner rather than later up until this week. Russia’s Ukraine invasion has resulted in a mild flight to safety and a corresponding dip in yields. The dip will likely not last that long as the Fed is expected to take some action at its next meeting.
Even before Russia invaded Ukraine there was more than an ample amount of uncertainty that the market was trying to sort through. The additional political instability only further muddies the waters. Throughout history the market has been tested over and over and it has always found its way higher. The exact timing remains unknown but should not be viewed as a reason to bail on all your positions. Heed stops, remain focused on your strategy, and be prepared to put cash back to work.
Pulse of the Market Table