In ancient Greek mythology, King Tantalus was condemned by the gods to stand in a pool of water under a fruit tree. Although the tree had low branches, he was never quite able to reach the fruit, and whenever he tried to drink the water, it receded.

Hence the word “tantalize,” which aptly describes the pandemic’s psychological effect these days on Wall Street and the rest of the world. Post-COVID normality seems to be getting closer, and yet, it eludes our grasp.

Pandemic-induced inflation is exacerbating the torment. Consumer prices are rising at a rate that’s beating already dire expectations. The 10-year Treasury yield at one point last week exceeded the 2% mark, for the first time since 2019, and investors are betting that the Federal Reserve will get even more hawkish in coming months.

Wall Street now surmises that instead of hiking the policy rate by the customary increment of 0.25% in March, the U.S. central bank could decide to boost it by 0.5%, which would represent the first half-point hike since 2000.

There’s no sugar coating it: Thursday’s inflation report was startling, and it triggered immediate tremors in the stock and bond markets.

The U.S. consumer price index (CPI) for January jumped 7.5% from a year ago, surpassing the 7.3% estimate and representing the sharpest gain since February 1982. Excluding the volatile food and energy components, prices increased 6% from a year ago and 0.6% from a month earlier.

U.S. stocks slumped last week amid volatile trading, with growth and interest-rate sensitive equities bearing the brunt of the damage (see table).

And yet, I see glimmers of hope. Inflation will probably remain elevated above the Fed’s 2% target for a while, but I expect to see price increases moderate in the second half of 2022.

Read This Story: Straight Talk About Inflation

It’s important to note that shipping costs have been falling since mid-November, and supplier delivery times are getting faster. In addition, higher interest rates prompt consumers to spend less, which should relieve pressure on strained supply chains.

If inflation does indeed moderate, the Fed will have leeway to reassess the pace of its tightening cycle and perhaps ease up on its hawkish stance. Such a shift would be manna for the stock market.

Crying wolf over Russia?

Worsening Wall Street’s jitters is the standoff along Ukraine’s border, with the cable news chyrons keeping viewers on edge by incessantly warning that a Russian invasion is imminent.

The hysteria over Russian’s intentions toward Ukraine reminds of a classic 1966 movie comedy: The Russians Are Coming, The Russians Are Coming.

Keep your perspective. It’s not a foregone conclusion that Russian President Vladimir Putin will launch a full-fledged invasion of Ukraine. The financial consequences for Putin and his oligarch pals would be quite severe, in the form of Western sanctions.

It’s entirely likely that the brinkmanship between the U.S. and Russia will extend indefinitely without military conflict, akin to the U.S.-Soviet Cold War. It’s unclear how markets would respond to an actual invasion. Stocks would probably selloff, at least temporarily, and energy prices would soar due to the imposition of oil and gas sanctions against Russia.

Regardless, geopolitical risk tends to be fleeting. The long-term fundamentals remain sound.

Pent-up consumer demand, a high household savings rate, a healing jobs market, and healthy corporate earnings are converging to sustain the recovery, with year-over-year U.S. gross domestic product (GDP) growth in 2022 estimated to exceed 3%.

Signs also are emerging that the Omicron variant of COVID is subsiding. An increasing number of governors, even in liberal blue states, are lifting mask mandates. In the U.S. and overseas, economic reopening is gaining traction as restrictions get lifted.

Until inflation starts to moderate, expect continued volatility and occasional selloffs. If economic data take a turn for the worse, equities could hand us a repeat of January, when the S&P 500 dropped 7%. That said, the financial ground seems to be seeded for green shoots of growth in the spring. Our prospects are tantalizing.

Editor’s Note: Reader opinion is important to us, which is why I place a high priority on answering your emails. Along those lines, coming soon is a webinar between Rudy Soto, chief of our customer service department, and Jim Fink, chief investment strategist of Options For Income, Velocity Trader, and Jim Fink’s Inner Circle.

Keep an eye out for this webinar. Rudy will ask Jim the most pressing questions posed by readers. Have a question for Jim? If you give us permission and we pick your question, we’ll read your name and city during the webinar. Send your questions to: mailbag@investingdaily.com.

John Persinos is the editorial director of Investing Daily.

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