Going back to World War II, the median market sell-off has been 5.7% after a geopolitical shock.
On average, it has taken three weeks for the market to reach a bottom and another three weeks for it to recover those losses.
Ultimately, the market isn’t driven by geopolitical events, but by the economic landscape.
Given the robust economic backdrop, the fallout specifically from this situation should be relatively short lived with the markets keying in on Fed policy and interest rates in order to dictate medium-term momentum.
U.S. Economy Remains Robust
The US economy is re-accelerating post-Omicron. While the invasion of Ukraine poses a minor headwind to growth, forward momentum is robust (GDP Now is 0.6% which is impressive considering January headwind – and should continue to strengthen as recent releases have been strong: IP, retail sales, and business inventories).
Importantly, the equity market’s YTD decline is explained by a contraction in P/E multiples as 2022 EPS estimates have risen by 2%. Earnings are well supported with nominal GDP likely approaching 10% this quarter.
Impact on Fed Policy Probably Negligible
The Fed has fulfilled its employment mandate (unemployment is 4%) and is focusing its entire attention on inflation. With inflation risks skewed to the upside, the Fed will likely not deviate materially from the market’s pricing of rate hikes from this situation. At present, the market is pricing in 5.9 hikes for 2022 (down from 6.4 hikes). While we’ve been more inclined to see a more dovish Fed than the market is pricing, we continue to believe that the Fed will slightly undershoot expectation.
Importantly, the Fed puts more weight into Core inflation rather than Headline because food and energy tend to mean revert and Fed policy acts with a lag. Put differently, higher materials/energy costs should not sway the Fed in a “material” way as the effects from tighter monetary policy generally kicks in when food/energy prices are deflating.
The Russian invasion of Ukraine may create a more dovish rate scenario, in particular with the ECB. We will get further clarity from Fed Chairman Powell when he speaks to Congress next week.
Core Inflation Not Likely to Rise Significantly Due to This Situation
Risk-off sentiment and uncertainty should put a bid under the dollar which historically has had a negative correlation with CPI.
Continued supply chain issues
⚬ Goods and material flow out of Ukraine and Russia will be halted and could exacerbate the supply chain issues many companies are facing (example: steel for autos).
Natural gas and oil price spikes will have a material effect on US headline inflation and minor impact on core inflation.
⚬ Pricing pressures should remain sticky here due to potential supply disruptions, precautionary hoarding, and an embedded geopolitical premium.
Stay tuned for the March AOR Update, including Recession Risk Dashboard updates and new commentary!
Investors rode a rollercoaster of emotions as rising hostilities at the Russian-Ukrainian border sent stocks sharply lower before a powerful late-week rally erased early losses.
The Dow Jones Industrial Average was flat (-0.06%), while the Standard & Poor’s 500 edged higher by 0.82%. The Nasdaq Composite index gained 1.08% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, lost an eye-catching 5.72%.1,2,3
The build-up to Russia’s eventual invasion of Ukraine triggered elevated market volatility, resulting in broad-based selling that sent the S&P 500 into correction territory as the holiday-shortened week of trading began.4
The sell-off culminated on Thursday morning following the overnight incursion of Russian troops into Ukrainian territory, though markets staged a powerful late-day recovery that coincided with President Biden’s announcing fresh sanctions against Russia. The afternoon rebound was remarkable, as the S&P 500 ended 1.5% higher after being down more than 2.6%, while the Nasdaq Composite closed 3.3% higher after dropping nearly 3.5% intraday. Thursday afternoon’s momentum continued into Friday as stocks rallied to end the week in positive territory.5
Setting aside the more important aspects of the human cost and damage to world order, Russia’s invasion of Ukraine introduced an acute layer of uncertainty into many layers of the financial markets. The immediate repercussion was the impact on global economic recovery due to rising energy prices, which reduce consumers’ discretionary spending and saddle businesses with higher costs.
The inflationary impact of higher energy and other prices, along with the prospect of decelerating economic growth, also complicates the Fed’s strategy to guide interest rates higher. Already, the probability of a 50 basis point interest rate hike at the Fed’s March 2022 meeting seems less likely than it was just a week ago. Finally, Russia’s actions have raised new concerns over second-order effects that could further unsettle markets, such as a new round of supply-chain disruptions.
This Week: Key Economic Data
Tuesday: ISM (Institute for Supply Management) Manufacturing Index.
Wednesday: ADP (Automated Data Processing) Employment Report.
Thursday: Factory Orders. Jobless Claims. ISM (Institute for Supply Management) Services Index.
Friday: Employment Situation.
Source: Econoday, February 25, 2022
This Week: Companies Reporting Earnings
Monday: Lucid Group, Inc. (LCID), Zoom Video Communications, Inc. (ZM).
Tuesday: Salesforce.com, Inc. (CRM), Target Corporation (TGT), Ross Stores, Inc. (ROST).
Wednesday: Dollar Tree, Inc. (DLTR), Snowflake, Inc. (SNOW).
Thursday: Broadcom, Inc. (AVGO), Costco Wholesale Corporation (COST), Best Buy Co., Inc. (BBY), Marvell Technology, Inc. (MRVL), The Kroger Company (KR).
Source: Zacks, February 25, 2022
“Who are wise in love, love most, say least.“
– Alfred, Lord Tennyson
Have You Created Your IRS Online Account?
The IRS makes it easy to create an online account where you can view all kinds of account information, such as:
You can even make online payments and get a digital copy of the most recent transcript of your tax return.
* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS.gov6
A “Berry” Important Superfood
Not only are blueberries delicious, but they are also a powerful superfood that has many potential health benefits. They are low in calories, can be added to countless dishes, and are the perfect easy snack. Here are some benefits of blueberries, according to Healthline:
Tip adapted from Healthline7
You have a can of soda in your hand and someone tells you to drink the bottom half of it first. How can you do that?
Last week’s riddle: You go in through one hole, you come out through three holes. Once you're inside you're ready to go outside, but once you're outside you're still inside. What is it? Answer: A Sweater.
Amalfi Coast, Positano, Italy.
Footnotes and Sources
2. The Wall Street Journal, February 25, 2022
3. The Wall Street Journal, February 25, 2022
4. The Wall Street Journal, February 22, 2022
5. The Wall Street Journal, February 24, 2022
6. IRS.gov, July 26, 2021
7. Healthline.com, September 30, 2021
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