Traders debate when stocks will ultimately bottom, with Russia-Ukraine added to growing list of concerns

Published Thu, Feb 24 202210:00 AM ESTUpdated Thu, Feb 24 202211:38 AM EST

Traders are embroiled in a debate about the impact of the Ukraine crisis on the Federal Reserve. A minority of traders feel that with such large geopolitical risks, the Fed should delay making major policy decisions. The problem is, the Fed was dealing with a major inflation problem prior to this, and the Ukraine crisis is only exacerbating that worry. Most, therefore, believe the Fed has no choice but to stick to its plan to raise rates beginning in March, adding that a 50-basis-point hike is now unlikely. Goldman Sachs' Jan Hatzius reflected this majority viewpoint in a note to clients: "We do not expect geopolitical risk to stop the FOMC from hiking steadily by 25bp at its upcoming meetings ... We suspect that some participants will see it as a compelling reason not to hike by 50bp in March." Current facts align poorly for stocks The reason the market has been selling off is that there is a combination of factors that historically has proven to be very negative for stocks. Higher inflation: Stocks do well during modest inflation, but periods of rapid inflation make it difficult for corporations to consistently raise prices. Slower growth: The U.S. is nowhere near a recession, but higher commodity costs, particularly oil, are going to slow economic growth. Fed tightening: While slow rate hikes in a strong economy is not necessarily negative, rapid rate hikes into a weaker economy is historically a headwind for markets. Any good news? There isn't much. One piece of good news: Stocks are cheaper. In the start of January, the S & P 500 was trading at 21 times 2022 earnings. It is now trading closer to 19.6 times, still slightly above the historic norm of 15 to 17 times but far cheaper than two months ago. When do we see a bottom? We won't see a bottom until we have clarity on where this is going. Still, there are classic signs of a bottom that traders traditionally look for, including a drop in selling pressure (not yet), multiple 90%+ downside days followed by 90%+ upside days (not yet), a divergence in new lows (not yet). There are some sentiment indicators that are at extremes. Retail investors are really bearish: Retail Sentiment: extreme bearishness Bullish 23% (historic average: 38%) Bearish 54% (historic average: 40%) Neutral 23% (historic average: 31%) Source: American Association of Individual Investors Another sign of extreme sentiment: CBOE Volatility Index (VIX) futures are in "backwardation" (current contracts are higher priced than contracts farther out). With the VIX at 37, futures contracts are far lower (33 for March, 30.7 for April), indicating traders are doubtful this conflict will remain a front burner for months on end. But with something like this conflict, no one is betting the farm on that. The only questions that matter are, how long will it last and how much worse does it get?

Traders work on the floor of the New York Stock Exchange (NYSE) on February 16, 2022 in New York City.

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Traders are embroiled in a debate about the impact of the Ukraine crisis on the Federal Reserve.