Russia invaded Ukraine and investors fell into a complete panic. Will the market get out of control further in the future?

Russia invaded Ukraine, and the Dow opened with a plunge of more than 800 points, its biggest one-day drop since March 2020. The S&P 500 has fallen for five consecutive days, reaching correction territory earlier this week. The Nasdaq Composite is close to a bear market. The Cboe Volatility Index rose to its highest level in 15 months. At the same time, oil prices soared to more than $100 a barrel, and safe-haven assets such as gold and the U.S. 10-year Treasury bond soared.

This is the first time since World War II that a major power has gone to war against a neighboring country, with the obvious goal of expanding regional dominance by annexing or establishing a puppet government. It is also the first time that Europe has faced war so closely, and the European security landscape and the existing world order face huge challenges. This has increased pressure on the global economy, which has already been struggling due to supply chain disruptions and high inflation caused by the epidemic, and investors are clearly in a state of panic. This has also put the Federal Reserve in a more difficult position.

Under the pressure of the highest inflation in 40 years, the Federal Reserve must start to raise interest rates on a large scale. Now facing the sharp rise in energy prices, the pressure of inflation has further increased, which means that the Federal Reserve is under greater pressure to raise interest rates. The market was originally worried that the interest rate hike would affect the US economy. Bank of America has predicted that the Federal Reserve will raise interest rates 7 times. Now the stronger interest rate hike means that the US economy is facing greater challenges, and the risk of falling into recession and rising inflation, that is, stagflation, is increasing.

The U.S. economy itself is actually relatively healthy. In the fourth quarter of last year, the U.S. economy grew much better than expected, with annualized GDP growth reaching 6.9%, thanks to a sharp increase in inventory and consumer spending. Economists had previously expected an increase of 5.5%. This also brings the U.S. GDP for the whole of 2021 to 5.7%. At the same time, The Conference Board's economic index shows that the upward trend in GDP at the end of 2021 will continue to expand into the spring. Although the first quarter may slow down to 2.2% due to the ravages of Omicron, GDP will grow by 3.5% in 2022, which is much higher than the growth trend before the new crown.

JPMorgan Chase's Business Leaders Outlook, released in January, surveyed small and medium-sized business leaders in the United States about their expectations for the coming year. 83% of them are optimistic about the prospects for the next 12 months, and 70% said their businesses have recovered or exceeded pre-pandemic profitability. 90% of respondents expect their businesses to grow and develop in 2022. None of the respondents said they were afraid of closing down. In fact, typical signs of expansion plans - capital expenditures and credit demand are expected to rise sharply from a year ago.

With good economic indicators, concerns about the impact of the Fed's interest rate hike on the economy have caused the market to fall sharply in January. Now that the Russian-Ukrainian war has broken out and oil prices have risen sharply, the Fed, which is already lagging behind in the inflation curve, must raise interest rates with all its strength in the face of new inflationary pressures. Whether the US economy can bear the dual pressures of soaring oil prices and interest rate hikes will determine whether the market will further lose control in the future.