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Weak stock markets so far in 2022 had been driven primarily by inflation fears and massive conjecture about the Federal Reserve and future direction of interest rates. But it took a geopolitical conflict to finally push the S&P500 into official correction territory, dropping more than 10% below its early January peak. But even before the Russia-Ukraine conflict came to the fore, most investors were already feeling the pain from the sell-off in the high growth stocks that had lead the stock market higher for most of 2020 and 2021. The 2022 decline was entirely explained by a contraction in price-earnings multiples, as 2022 earnings estimates had actually been rising, with 57% of companies and seven of eleven sectors experiencing upward revisions. But the advance was narrow, with most of the gains so far this year concentrated in the energy stocks as well as some selected cyclicals such as banks and metals. The chart below shows that 37% of stocks in the Canadian TSX and 43% of stocks in the S&P500 were already in bear markets (down more than 20%) even before the Russian armies moved into the Ukraine. The anticipation of rising interest rates to control the highest inflation rates in over 30 years had been shrinking stock valuations for the last few months, pushing the ‘tech heavy’ Nasdaq Index into an official bear market. (more…)