At the start of the quarter the market was recovering from COVID-related selling, then came war, surging inflation and a Federal Reserve ready to increase rates.

As a result, the S&P 500 retreated 5%, its first quarterly drop since the COVID-induced plunge in 2020 Q1. Most stocks were weak, especially growth stocks. The tech-heavy Nasdaq fell nine percent 9%. Shockingly, the average stock in both the Nasdaq Composite and Russell 2000 lost a third of its value in the first quarter and lost half of its value from its 52-week high.

Stock, bond and commodity markets experienced a degree of volatility seldom if ever seen. Never mind the level of the Dow Industrials at a given moment. It could soon be 700 points higher or 500 lower, then turn again. As John Templeton said, “Stock prices are a lot more volatile than stock values.” Indeed.

The tragic war captured the headlines, but for stocks inflation was a bigger story. Inflation, which surged to its highest level in four decades, is the arch enemy of financial assets because in the future money will buy less and less. The Federal Reserve made a colossal mistake by stimulating the economy for too long and expanding the money supply by 40%. Russia’s invasion of Ukraine rattled already stretched supply chains.

The bond market was in full retreat, pricing in Fed rate boosts both larger and more frequent than had been earlier thought. Mortgage rates have soared and are now above 5%. Applications are down. Rates on all kinds of loans are rising. The economy will pay the price.

Will high rates turn back inflation? At some point they will, but at what level? Will rising rates increase the chance of a recession as the economy slows? Yes. In a recession high inflation would be gone, but so will many jobs, some tax revenue and consumer confidence. Forget GDP and earnings growth. Those will slow.

The stock market is giving conflicting messages. When interest rates rise utilities are traditionally among the worst performers because their dividend yields become less attractive, and they are large borrowers. But the utility SPDR (XLU) set an all-time high last week. What?

Utility revenues track nominal GDP growth. If growth is set to slow or even disappear in a slowdown as rates rise why are utilities doing well? At the same time bonds have retreated at a pace almost without precedent except for Volcker’s time. Is extraordinary action needed to control inflation or are we at the top of the inflation surge? I’m glad I don’t work for the Fed.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.