Vladimir Putin, Yevgeny Prigozhin, and Jerome Powell. Those three names together resemble the beginning of a “walk-into-a-bar” joke. But the risks these men pose are no joke.

Turmoil in Russia and uncertainty over Federal Reserve policy are the wild cards that will substantially drive the markets in the second half of 2023. Let’s decipher the enigmatic trio of Putin, Prigozhin and Powell, and see how their actions affect the markets and your portfolio.

Russia grabbed center stage this past weekend, in the wake of a short-lived military revolt waged by the Wagner mercenary group against Russian President Putin. Wagner warlord Prigozhin marched his troops onto Moscow, out of disgust with the Russian military’s incompetence in Ukraine. Prigozhin eventually withdrew, but the damage has been done to Putin’s already battered reputation.

The aborted coup (if it can be called that) ended with a truce, but it’s a reminder that unexpected events from overseas always threaten to upend assumptions.

The Wagner rebellion has demolished the myth that Putin is untouchable. How the antagonism between Putin and his erstwhile ally Prigozhin plays out is anyone’s guess. Prigozhin’s ultimate aims are murky.

As hedges against strife in Russia and Eastern Europe, I continue to recommend gold, which is the classic safe haven asset against crisis.

According to the latest long-term forecasts, the price of gold will hit $2,000 per ounce by the end of 2023 and then well over $3,000/oz by mid-2025. As of this writing, gold hovers at $1,940/oz.

I also think energy prices are poised for a rebound. The stunning fact that Putin faces serious threat of ouster after his two-decade autocratic rule, coupled with the reality that he helms a major OPEC+ oil producer, should provide a tailwind, as well as greater volatility, for oil prices. Energy tends to prosper when it appears that supply might be disrupted by geopolitical chaos.

Any further destabilization in Russia would probably lead to a nervous oil market with a likely spike in crude oil prices to $90 per barrel or higher. As of this writing, West Texas Intermediate, the U.S. benchmark, hovers at $70/bbl, and Brent North Sea crude, on which international oils are priced, at $74/bbl.

Will Powell ka-pow the markets?

Then there’s Federal Reserve Chair Jerome Powell, who is scheduled to speak this week. The voluble Mr. Powell has a way of talking down the markets with gratuitously hawkish commentary that belies actual Fed policy.

The Fed, and central banks globally, do not yet seem done with their rate-hiking cycles. The Fed has indicated up to two more rate hikes are likely, although it may be moving towards a pause in the back half of the year.

Inflation is likely to cool amid economic deceleration, although Powell has said that rate cuts aren’t likely until 2024. Markets may face some periods of volatility as the economy softens, but this will give investors an opportunity to position for a recovery period ahead.

The U.S. economy is heading towards below-trend growth, but at the same time, it has defied expectations of a full-blown recession. This is in large part due to the resilience of the labor market, which still boasts an unemployment rate of 3.7% and healthy wage growth of 4.3%.

Consumers are generally more comfortable spending when they’re fully employed and feel secure in their jobs. That said, some leading indicators of the labor market point to pending softness, including rising jobless claims, lower quits rates, and falling job openings.

What’s more, leading economic activity indicators, such as the ISM manufacturing and services indices, and particularly the new orders components, are all moving lower.

The long and variable lags of the Fed’s tightening campaign are catching up with the economy, which helps explain last week’s slump in equities (see chart).

The main U.S. stock market indices closed mostly lower Monday as follows:

• DJIA: -0.04%
• S&P 500: -0.45%
• NASDAQ: -1.16%
• Russell 2000: +0.09%

Global investors should be grateful that the Russian drama abated before the markets opened Monday. If not, the losses likely would have been much worse.

WATCH THIS VIDEO: The Fed and The Wisdom of Inaction

The Federal Reserve Open Market Committee (FOMC) has indicated in its June projections that the peak fed funds rate may get to 5.6%, implying two more rate hikes from here.

However, as interest rates remain high, lending standards get tighter, and the economy slows, it’s my view that headline inflation will likely head towards 3.0% by year-end, giving the Fed room to step to the sidelines on rate hikes.

The S&P 500 is up over 13% year-to-date, albeit still largely driven by a handful of sectors and large-cap technology stocks and supported by investor enthusiasm around the emerging artificial intelligence (AI) sector.

More recently, however, we’ve started to see some broadening of participation, with small-cap stocks and cyclical sectors such as industrials and materials rebounding. The New York Stock Exchange Advance/Decline (NYAD) line still hovers above its 50- and 200-day moving averages, which signals improving market breadth. The S&P 500 also is trading above those two moving averages.

Economic data in the week ahead…

It’s a puzzling paradox: Most Americans express pessimism over the economy even as it shows surprising strength. Unemployment stands at its lowest level in 54 years; the S&P 500 and NASDAQ are in a new bull market; inflation has dropped by more than half since hitting a peak of 9.1% in June 2022; and corporate earnings are projected to return to positive territory in the second half of 2023.

The relentless drumbeat of negativity from partisan media outlets has fueled the widespread and erroneous perception that everything is going to hell in a hand-basket. Many people live in a misinformation bubble. But as an investor, you need to follow the facts. We’re getting a fresh deluge of economic facts this week.

The salient economic reports to watch in the coming days are durable goods orders; S&P Case-Shiller home price index; new home sales; and consumer confidence (Tuesday); Fed Chair Powell speaks (Wednesday); Powell speaks again; initial jobless claims; and pending home sales (Thursday); personal consumption expenditures (PCE) price index and consumer sentiment (Friday).

Opportunities are forming in both equities and bonds for the 12-24 months ahead. While 2022 was a tough year for investors, I’m seeing nascent signs of a rebound, particularly in sectors that were hardest hit last year. The S&P 500 sector leadership has started to show signs of broadening, with industrials and materials now positive year-to-date.

The temporary headlines pose short-term risks, but for the long term, the fundamental and technical indicators make a bullish case.

Editor’s Note: I just described reasons why you should remain bullish. However, if you’re still nervous about the uncertain conditions I’ve just described, I suggest you consider the advice of my colleague, Robert Rapier.

As chief investment strategist of Rapier’s Income Accelerator, Robert has developed strategies that make money in bull or bear markets.

Robert Rapier can show you how to squeeze up to 18 times more income out of dividend stocks, with just a few minutes of “work” each week. Click here for details.

John Persinos is the editorial director of Investing Daily.

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