‘Outright Recession’: Wilson Warns On ‘Polar Vortex’

Sometimes (ok, quite often), it pays to think counterintuitively.

Late last week, when the White House issued an urgent warning for Americans in Ukraine to evacuate, crude prices jumped. Brent hit $95 for the first time since 2014.

It marked the culmination of a long-running rally. Crude is currently in its best run of weekly gains in quite a while (figure below).

Volatility, meanwhile, is elevated.

It’d be tempting to say any Russian incursion into Ukraine would exacerbate the situation materially, driving energy prices higher still, and thereby bolstering related stocks.

But as Morgan Stanley’s Mike Wilson wrote Monday, additional gains from here may risk demand destruction.

“Our attention has always been on oncoming risk, but it shifted more aggressively about a month ago when the Fed minutes came out in early January,” he said, adding that “if growth begins to disappoint, we think economically sensitive stocks, or cyclicals, will underperform the most.”

One might be inclined to push back on that, at least as it relates to energy shares, which have outperformed handsomely in 2022. But Wilson isn’t buying it.

“Energy is a special case given the state of affairs in Russia/Ukraine although ironically, energy stocks could be most at risk for a correction should a potential invasion happen in a way that leads to an oil and nat gas spike,” he wrote, warning that “such a spike would destroy demand, in our view, and perhaps tip several economies into an outright recession.”

He called that “the polar vortex” scenario, an allusion to his “fire and ice” macro framework. Note that consumer sentiment in the US is already at a decade low thanks in no small part to inflation. Another dramatic surge in gas prices would be insult to injury — it might also be the last straw.

Do note that additional gains for crude wouldn’t just affect prices at the pump and heating bills. “It’s just a disaster,” Isaac Larian, founder of toymaker MGA Entertainment, told Bloomberg, for a lengthy piece called “Oil’s Relentless Climb Toward $100 Wreaks Havoc on Company Profits.”

Larian, who, like other executives, is grappling with supply chain disruptions and rising wage costs associated with acute labor shortages, now faces the daunting prospect of even higher shipping rates and more costly plastic resins. In the same interview with Bloomberg, he stated the obvious: “We’re dealing with a consumer that’s stretched. If a $10 doll suddenly becomes $25, there are people who can’t afford to buy it.”