Financial markets are lurching along, buffeted by the ongoing war and humanitarian crisis in Ukraine, skyrocketing commodity prices and new milestone heights reached in U.S. inflation. With all this, it’s understandable that emotions in markets may be running high.

And indeed, investor anxiety has grown. Last week we discussed concerns about stagflation—a period of higher inflation and slower economic growth—and shared why we need to distinguish between markets and the economy, as prospects for them are diverging.

More recently, as reflected in the bond market, worries now seem to go beyond the possibility of stagflation to the potential for an outright recession. The difference between short- and long-term Treasury yields has been collapsing, recently hitting a cycle low of 21 basis points. This flattening of the yield curve reflects a negative outlook for the economy.

While the Morgan Stanley Global Investment Office remains cautious in navigating today’s market volatility and understands the complications that the war-induced commodity shock delivers to the global economy, we are far from calling a U.S. recession. There are three reasons why:

• The severity of commodity prices: Of all the kinds of inflation, commodity-based increases tend to be the most self-curing sort, and thus temporary. Usually, higher prices rapidly lead to greater production, which is often simultaneously met with lower demand. Morgan Stanley Research Chief Cross-Asset Strategist Andrew Sheets notes that the per-barrel oil price, when adjusted for aggregate inflation, remains well below that seen in the 1970s and 1980s, in 2006 and as recently as 2012. Similarly, relative to real assets such as gold and copper, Brent oil is still priced around its 25-year average.

• Inflation’s effect on consumer spending: Higher gas and grocery prices are an immediate “tax” on consumers and will likely weigh on sentiment. The current trend in energy prices is estimated to deliver a $200 billion hit to U.S. consumption, or $1,600 per household, for the year. That figure is noteworthy, but it pales against estimated excess U.S. household savings of up to $2 trillion. Spending on gasoline has declined 60% as a share of the consumer wallet during the past four decades, which should help subdue the impact of higher prices. And, although inflation is still outpacing wage gains, Morgan Stanley economists expect the trend to flip by midyear, another pillar that could help overall demand and support continued strength in spending.

• U.S. capacity to be energy-independent: Foreign energy imports account for less than 5% of total consumption today. U.S. oil drillers are operating only 527 oil rigs in comparison with 1,592 at the peak in 2014. Returning that capacity while improving well productivity could meaningfully offset the current situation. In particular, on the need to fill gaps now that Russian oil and gas are off the table, Washington appears to be working aggressively on attracting recently suppressed supplies from Venezuela and Iran. And the European Union is rapidly strategizing on alternatives to Russian energy with a combination of new liquified natural gas sources and an expansion of “green” sources.

While we see reasons to be confident about U.S. economic strength, the stark geopolitical and inflationary backdrop means stock and bond markets will likely continue to see volatility, and passive index-level investing remains challenged. Investors should keep an eye on core inflation, which excludes food and energy prices, as this reading is likely to peak in the next few months and will ultimately drive monetary policy and inflation expectations.

Today’s complicated crosscurrents mean investors will need to be selective. Be patient but opportunistic and look for quality names at reasonable prices that can benefit from a resilient economy. Our focus remains on financials, energy, industrials, healthcare and consumer services.