Lenin once said, “There are decades where nothing happens; and there are weeks where decades happen.” I believe for today’s economy and stock market; no truer words have been spoken.  This is one of the most stressful periods I have seen since I began to watch markets in 1998.  There’s so much information and events transpiring that I feel it’s safe to say that the world that we knew a month ago is history.  We have an economy that is still trying to normalize and now what appears to be a new world order firmly taking shape.

We are in the midst of an acceleration of de-globalization, or perhaps a reshuffling, as China and allies seek to turn the financial world on its head with the U.S. and Europe.  The cold war is over and the beginning of World War 3 may have just begun.  Though, this one will be very different with much of the battle being financial and cyber in nature, but it obviously raises the risk of more violent outbreaks.

A major food crisis that disproportionally hurts many emerging economies over the next few years is quite possible.  If inflation continues to persist, even after peaking, the likelihood of unrest is highly elevated everywhere.  They say the cure for higher prices is often higher prices.  The rising costs of commodities may go much higher, but it can also cause a breaking point in prices in what is termed as demand destruction.  It’s not impossible that we violently shift from periods inflation and deflation in this setup.

This is the most challenging environment for investors that I can ever remember.  Though improving, your cash still pays next to nothing, and inflation is very high. I can’t remember a more complicated situation.  Typically, bonds have served as a safety net in turbulent times, but so far this year they have started the year down faster than any other in the last 40 years.

The stock market has done very well the past 12 years as there’s been no real alternative prospect for earning a decent return.  Now I believe with it elevated over the past decade, with many systemic risk factors at hand, it’s not nearly as attractive as before.  So, what is an investor to do?

First, I think it’s important to realize that the equity markets could still do quite well.  The U.S. can weather inflation far more than most nations.  Equities can perform well in inflationary environments.  We are geographically blessed, and we have great trade partners in Canada, Mexico, and Japan.  We also have strong resources in food, water, and energy.

The Federal Reserve has consistently stepped in, printed money, pulled forward more demand from the future, and has repeatedly tried to keep risk assets like stocks and real estate elevated.  Like it or not, they are likely to do so again.  These measures have shown good for the markets, in the past.  When so many rely upon their investments to live, they aren’t likely to sit idle if markets were to decline precipitously.

New areas of investment in infrastructure and defense to rely less on China, and guard our international interest are likely to increase.  Natural resources should show good investment promise over the next decade.  The trick will be that they could fall during a recession, but then rebound stronger than most areas if the Federal Reserve and government step in.

The confusing part is that now with inflation, the Fed is trying to engineer a soft landing by threading the needle of dampening support for demand and the markets to the point of breaking inflation, but not the economy as a whole.  This will be no small feat, but it’s not impossible to engineer a goldilocks situation.

The longer a recession can be kept from happening, it’s still possible the market could see new highs this year.  The stock market is a very different machine today than it was just 10-20 years ago.   The dollars that flow from 401ks are consolidated into fewer names.  They are more focused into “passive” vehicles, leaving less discretion from money managers.  If the discretionary managers go to highly elevated cash positions, such as what we’ve recently seen, it could snap back as the flows from 401k’s keep coming in and there’s no sellers left.  The possibility of the market moving strongly higher is still present.

From my perspective, there’s still too many unknowns and conflicting currents of data to say definitively how this will all play out.  I tend to believe a more conservative approach is probably best for the time being.