The first quarter of 2022 was the most volatile period for markets since the start of the pandemic, and the second quarter isn’t looking any better!

Last quarter I mentioned 4 risk factors. I should have mentioned the fifth: war.Two of the risksreceded, covid and slowing earnings. Of the other two risks, inflation is proving stickier than many expected, but the Fed has yet to do anything that could be construed as a mistake.

As the second quarter of 2022 begins, there are four major issues to watch:

The Russia-Ukraine War: Will the conflict expand, (Russia vs. NATO?) and, if not, how long does it continue to elevate commodity prices and choke off economic growth to a greater extent?

Inflation: It keeps getting worse. Higher inflation isn’t just making the Fed more aggressive with rate hikes, but at some point it will begin to compress corporate margins or destroy consumer demand.

Quantitative Tightening: In the next month, the Fed will announce its plans to reduce the balance sheet, known as Quantitative Tightening. That will be another form of tightening policy – one that could slow growth if it happens too quickly.

The Fed: The Fed is raising interest rates. At the start of the year, the market expected four 25 bps rate hikes. Now, the market may get four 50 basis point rate hikes between now and year-end.

We can also expect to hear headline speculation regarding an inverted yield curve. The important factor is the level of real interest rates. When interest rates are a couple of percent over inflation, that is the kind of monetary tightening that can slow an economy. We are a long way from that. However, since rates will be rising coincident with the Fed’s balance sheet runoff, the effect could tip us into recession sooner than it otherwise would.

Bottom line, we should all brace for more volatility in the second quarter. The outlook is not bearish, but I expect short-term market volatility. Realistic expectations are important. Prepare adequate liquidity to weather the storm as your circumstances require.

These issues that will drive near-term volatility. Longer term, earnings will drive markets higher.

Investing involves risks witch may include loss of principle. Past performance does not guarantee future returns.