Welcome to my latest video presentation. Below is a condensed transcript; my video contains additional details and several charts.

For U.S. stocks, the bear market lows of June priced in considerable pessimism about inflation, interest rates, and the economy. This pessimism is lifting, as Wall Street starts to think that the worst is in the rearview mirror.

As I’ll explain, though, Europe’s woes are considerably worse than America’s, largely due to the Continent’s reliance on Russian energy and proximity to the Russia-Ukraine war. As winter arrives, the energy crisis in Europe could deteriorate and exert a spillover effect on the global economy.

Analysts currently place the likelihood of a recession in the next 12 months at 25% for the U.S. and 50% for the eurozone. The consumer price index (CPI) in the U.S. rose on a yearly basis to 8.5% in July. Analysts forecast that the U.S. CPI report for August, scheduled for release September 13, will show a decline in the yearly inflation rate to 8.0%. Eurozone annual inflation is expected to hit 9.1% for August, up from 8.9% in July.

In the U.S., although interest rates have spiked this year, they’re currently below their summer peak. The yield on the benchmark 10-year U.S. Treasury note reached 3.5% in June; as of this writing on Monday the yield hovers at 3.3%. It’s likely that we’ve seen the bulk of the rise in rates.

U.S. stocks last week snapped a three-week losing streak, as investors accentuated positives such as strong jobs growth and moderating inflation. The price of crude oil has slipped below $90 per barrel, which eases inflationary pressures.

A major bright spot in the U.S. economy has been consumer spending, officially known as personal consumption expenditures. Despite elevated inflation and rising interest rates, the American consumer has kept the purse strings loose.

The technology-heavy NASDAQ jumped by 4.1% last week, as bargain hunters scooped up beaten-down tech stocks that are poised to thrive once challenges such as the pandemic are behind us. Year to date, the S&P 500 is down 14.7% and the European-dominated developed market index EAFE is down 22.9% (see the following chart, with data as of market close September 9).

So far this year, the most punished investments have been cryptocurrencies, meme stocks, special purpose acquisition companies, non-fungible tokens, and other high-fliers that initially benefited from excess liquidity and fear of missing out.

I’ve consistently warned you about highly speculative investments such as Bitcoin, and it’s not a bad thing that froth has been removed from the markets. Year to date, Bitcoin’s value has dropped by more than 59%. Conversely, during this bear market, value plays and quality dividend payers have held their own.

Europe’s winter of discontent…

The Russia-Ukraine war has affected all economies around the world, but Europe has borne the brunt of the pain. The European Union is heavily reliant on Russian oil and gas, and although major EU economies are making progress in weaning themselves away from Russian-supplied energy, the dislocations for households and businesses are severe.

Russian President Vladimir Putin has threatened to cut off all energy supplies to Europe, in retaliation for Western sanctions.

The International Monetary Fund (IMF) recently calculated the potential economic harm of a complete cessation of Russian gas supplies on the economies in the eurozone.

The IMF study shows that over the next 12 months, the EU would lose 1.8 percentage points of gross domestic product growth compared to the baseline scenario. The most affected countries, such as Germany and Italy, would lose between two and more than four percentage points.

The good news is that EU leaders are showing remarkable solidarity in stockpiling oil and gas and shifting to alternative energy sources, thereby weakening Putin’s ability to weaponize Russian oil and gas exports.

Another encouraging development (unless you’re a Putin loyalist) is Ukraine’s successful blitzkrieg this past weekend. The war has entered a particularly dangerous phase, because Putin has been humiliated and he still wields a huge nuclear arsenal, but the shocking rout of Russia’s forces in northeastern Ukraine gives the West more leverage.

The week ahead…

In the coming days, these are the key economic data to watch: the New York Fed’s three-year inflation expectations (Monday); the NFIB small business index and consumer price index (Tuesday); the producer price index final demand (Wednesday); initial jobless claims and retail sales (Thursday); and consumer sentiment (Friday).

Conditions for U.S. stocks are improving, but we’re still witnessing plenty of headwinds, especially overseas. A negative inflation or jobs report this week, or an extreme move by Putin, could trigger another big selloff. But there are investing methods that generate income, regardless of these risks.

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John Persinos is the editorial director of Investing Daily.

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