companies cared or even thought about security of supply. But the Ukraine conflict could help change all that. The COVID-19 pandemic has already exposed vulnerabilities in global supply chains. And now, the war has demonstrated the potential for the weaponization of oil, natural gas, grains and other commodities. If, in response, other countries focus on rebuilding and safeguarding their own internal economies through securing endogenous supply, then globalization will take a very different – and constrained – form going forward. Cost will not matter as much as security of supply, and that means prices will probably go up.

That feeds into our second important macro force, inflation. Coming out of the pandemic environment (however haltingly), central banks’ easy-money policies and continuing supply-chain issues had finally succeeded in overheating the global economy. Now, Russia’s invasion of Ukraine has only added fuel to the inflation fire, made worse by a supply crunch in energy and food – two sectors that, beyond relying on the conflict area for a good chunk of global production, have also been suffering from under-investment for years.

High inflation is the defining issue for our third macro factor: the Fed. Monetary policymakers believe they are way behind the inflation curve from an interest rate perspective. Clearly, the cost of debt is going up, perhaps dramatically, but the equity market reaction has been relatively muted. That could give the Fed cover to act more aggressively on rates than they otherwise would. It’s the same dynamic with the reaction to the Ukraine conflict: as long as markets believe they are insulated, the Fed will have leave to continue hiking; if the conflict subsides and markets react positively, then it might well decide to increase rates more drastically and more quickly than it otherwise would have.

Here is the concern, however: Inflation is probably at or near its peak. As well, the U.S. economy is likely to slow down on a rate-of-change basis over the next quarter or two. The Fed is trying to engineer a soft landing as it raises rates an expected eight times over the next year or so. Attempting that while inflation is peaking and growth is rolling over seems like a recipe for policy error. Recall the fourth quarter of 2018, when GDP growth was slowing as the Fed was hiking, and the stock market dropped by 20%.

In our view, the very real potential for a Fed policy error – in short, the unlikelihood of its being able to orchestrate a soft landing for the U.S. economy or the equity markets – caps the upside for the broad base of U.S. stocks and opens the possibility of more downside. We expect the central bank to hike as aggressively as it can until the equity market and the credit market respond with undeniable pressure – something they have yet to do. After that, the Fed will probably take its foot off the pedal. In the meantime, we expect the market broadly to be challenged for the next three to six months, as the complex relationship between war, inflation and monetary policy plays out.