In this monthly series, Stockhead discusses the markets outlook with David Jones, Chief Market Strategist at investment platform In his analysis, Jones highlights the key macro trends underpinning markets, as well as specific stocks/sectors to watch.

Stockhead’s latest catchup with strategist David Jones took place in the wake of a wild month on markets, which saw the advent of a major military conflict and the first US rate rise since 2018.

In view of that, there was a lot to unpack; inflation, commodities, and the latest tech rally on the Nasdaq which caught some analysts off-guard.

The inflation genie — back in the bottle?

Jones doesn’t think so (not yet anyway).

In terms of stock market drivers, few have been as prevalent as the shift last November, when markets collectively took the view that inflation (may) prove more than transitory and policy makers (may) have to raise rates faster in response.

The Nasdaq briefly fell into a bear market (-20%), before an equally sharp rally.

Tighter financial conditions may not prove to be a death knell for high-growth tech stocks, but at the very least they’ve caused a spike in volatility.

And Jones thinks 2022 may bring more of the same as the year progresses.

“I think inflation could still end up being an even bigger problem than we think now,” he said.

For a simple recent example, he noted that when the Fed raised rates last week, the bank revised its year-end inflation forecast upward to 4%.

Just three months ago, the Fed thought 2022 inflation would top out at only 2.7%.

“I think that’s quite telling, and suggests they perhaps have as little clue where inflation might go as the rest of us do,” Jones said.

“So there’s still come challenges there, and even though rates are rising now it suggests the Fed might still be a bit behind the curve on inflation.”

The complex task now facing policy makers — to raise rates without wrecking the post-COVID recovery — is one of the reasons Jones is bracing for more volatility.

“I think it’s gonna be a tough balancing act,” he said.

While core supply-cost commodities such as oil have risen sharply in the wake of Russia’s invasion, Jones used the example of cotton to show how broad that supply-cost pattern has become.

“Like a number of other commodities, cotton prices were rising all through last year,” he said.

“So at the time, I didn’t understand why central banks were so confident that inflation was going to be transitory because the price of all of these core inputs, ‘stuff’ was just going up and up.”

For investors, the next question relates to how well equity markets respond to an inflation outlook that may mean rates have to rise meaningfully for the first time since before the 2008 financial crisis.

“Obviously the Fed will be reluctant to raise rates too aggressively, but I think we’ll get to a point this year where the nervousness increases (about how far rates will rise),” Jones said.

“The fact is we’re still at ridiculously low levels of rates, and have been for 14 years. At the same time, I think inflation will stay stubbornly high.”

“So it’s a real challenge for central banks to not freak out markets too much, but do what they have to do to control inflation.”

In that sense, the current market paradigm does feel like “somewhat unprecedented times”, he said.

“We’ve been spoilt by low inflation, a rising market and low interest rates for a decade-plus. So this could still be a year that some of that changes,” he said.

As for that other thing…

So, if the inflation genie is staying out of the bottle, how worried should investors be about the prospect of World War 3?

Already, the past 7-14 days have given rise to some unique price action.

Since the Fed raised rates on March 15/16, the Nasdaq 100 has risen by more than 10%.

The tech rally has also taken place amid the ongoing Russia-Ukraine conflict, which initially wobbled markets on February 24 before investors shrugged it off.

That marks a repeat of recent history, where it’s been quite common for geo-political strife to catalyse a short-term pullback before stocks march higher.

“It’s an old market cliche; buy on the sound of cannons,” Jones says.

“But I do think it’s a bit different this time round, and there’s a sense the broader conflict could still get worse before it gets better.”

Time to hide the cash under the bed and buy gold?

“Clearly gold and oil had a significant move on all of this. But gold still didn’t take out highs it reached in the summer of 2020,” Jones said.

“If the prospect of WW3 can’t get gold to all time highs, then what does it take?”

But in terms of risk management, the unpredictability of the conflict means markets are left to climb a wall of worry.

“I still think it’s quite nervy. We know something could happen on any given day, and suddenly sentiment gets tipped on its head,” Jones said.

“So the recent rally is impressive from a confidence point of view. I don’t think we’ll see things fall off a cliff, but until we have certainty either way, we’re still going to see some choppiness there in markets.”

The views, information, or opinions expressed in the interview in this article are solely those of the writer and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.