Whether it was friends or total strangers, everyone seemed to have the same question for me on a recent trip. Is it time to buy the dip in stocks? After all, U.S. stock markets have already had a few encouraging bounces in the past two weeks of trading, though they proved both temporary and more than fully reversible.

Few have liked my answer because it contends that economics, finance and related policies have been relegated to the back seat when it comes to the drivers of price action. At this stage, their market question is closely related to a political and national security calculation associated with Russia’s invasion of Ukraine: Is there an offramp for Vladimir Putin anytime soon? If there is, the occasional bounce could translate into a sustainable longer-term rally. Absent that, more unsettling financial market volatility is in the cards.

The war aggravated what was already an unpleasant start to 2022 for stock investors. The top U.S. stock indexes are now down 10% to 18% this year, while widely followed indexes for Europe and emerging markets have fallen 15% and 12%, respectively.

Until recently, BTD was a profitable strategy—so much so that the investor conditioning that came with it made the dips less pronounced and shorter, especially as “fear of missing out” and “there is no alternative” to stocks joined the fray. What made BTD particularly successful is that markets were consistently supported by huge and predictable injections of liquidity from central banks as well as interest rates pinned near zero.

Data suggest that, during the first week of the war, retail investors were inclined to maintain this approach. But their purchases collided with sales from institutional investors, rendering the strategy less effective in maintaining and building on a short-term bounce. Behind this apparent change is a weakening of the central bank shield that, for too many years, decoupled ever-higher asset prices from fundamentals.

With raging inflation threatening to worsen in the next few months, the Federal Reserve has little choice but to ease its foot off the stimulus accelerator—a necessity that is amplified by the extent to which the central bank’s prolonged mischaracterization of inflation as transitory has damaged its credibility and caused it to lose control of its policy narrative. With that, markets are now a lot more exposed to the four-level economic impact of the war: direct repercussions on Russia and Ukraine, spillbacks to advanced countries, spillovers to developing countries, and changes in the functioning of the multilateral system.

The longer the war continues, the greater the magnitude of these four effects and the larger the scope for their adverse interactions. With that comes a simple but critical question: Can Putin find his way out anytime soon?

Without an orderly end to the war, the disruptions to commodity markets and supply chains will intensify, as will “self-sanctioning” by the corporate world; Europe will be pushed into an inflationary recession; China and the U.S. economies will slow notably; some commodity-importing developing countries will risk foreign-exchange and debt crises; and the new stagflationary baseline for the global economy as a whole will be associated with a growing risk of an outright global recession.

Neither economic and financial policies nor markets are well positioned to deal with this combination, let alone overcome it.

Traditionally, stagflation has been one of the hardest challenges for policy making. It is compounded because the war in Ukraine came when the Fed had already fallen behind inflation realities and failed to build the much-needed flexibility for its policy responses.

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