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Cold War 2.0 – Midterm Bottom Nears

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In the table here 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.

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.

However, the market showed some impressive resilience to
this invasion with the big rebound yesterday and 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.

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