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What the Market? - Mar 07, 2022
A quick note from the authors
As the Russian-Ukrainian conflict continues, we recognize that this is a difficult time for many. We will continue to monitor with the aim to explain the impacts of the ongoing conflict on the markets and offer suggestions on how to navigate a highly complex and uncertain scenario that will undoubtedly have numerous long-lasting socio-economic implications.
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What the Market?
Mr. Market has a whole lot of uncertainty to deal with and it’s not the kind with any real positive outcomes. As expected, both the uncertainty regarding the impact of Russia’s invasion of Ukraine and the potential escalation of the conflict continues to drive erratic price swings across asset classes. On an economic bright side, jobs data appears to suggest that our economy is recovering well and the pandemic is beginning to subside as COVID mandates are ending.
What’s driving the market?
Russian-Ukrainian Conflict: As the conflict continues on through it second week, global commodity prices have surged due to supply chain disruptions. Oil and wheat prices reached multi-year highs. Western nations have doubled down on economic sanctions which have plummeted the Russian economy to the point of a possible recession. The growing concern is that the West’s financial chokehold on Russia may lead to more drastic actions that could cause escalation beyond Ukraine and into NATO territory. Threats of nuclear war and rising civilian casualties have increased tensions particularly as peace talks have had limited results.
Did anyone look at the jobs report? The February jobs report reported the addition of 678K jobs and drove unemployment down to 3.8%! This far exceeded market expectations of 400K and likely provided the Fed with the proof they need to comfortably raise interest rates. Last week, the Fed’s Chairman told Congress he would support an interest rate hike of 0.25% in the next FOMC meeting starting March 20th - a tempered hike compared to prior rhetoric of a 0.5% increase likely due to the conflict in Ukraine, worsening global conditions, and higher commodity prices that will ultimately hit headline inflation (we will be getting February’s CPI reading on Thursday).
What’s an investor to do?
While a more tempered approach to tightening monetary policy may have short-term benefits in equity markets, the invasion will likely lead to slower growth and higher inflation down the road; energy and food prices have already skyrocketed.
It’s time to play defense. Continue building a resilient and balanced portfolio focused on assets that will benefit from such an uncertain global scenario and the potential extension of inflation. Consider increasing exposure to:
Defensive stocks (think non-cyclical, utilities, consumer staples, healthcare) and high-grade bonds;
Commodities and aerospace & defense companies which will likely benefit from the current scenario. Metals have reached high’s across the board as the flight-to-safety continues. Despite the recent breather, expect speculative and growth stocks to face significant headwinds in the weeks ahead.
Keep an eye on the economy
Consumer Price Index (inflation): On Thursday the Bureau of Labor Statistics will present February’s CPI. Inflation is expected to continue rising to 7.9%. It does appear to be a strong peak signal as we enter the 21st consecutive month of inflationary pressures. However, the inflation reading will not include any signals of the potential impact of the Russian invasion so expect inflation to pick up once again in March. Oy vey…
The Curious Investor
No deep-dive this week
What we’re vibin’:
Her on Amazon Prime. The romance/sci-fi movie featuring Joaquin Phoenix, Scarlett Johansson and Chris Pratt won four Oscars in 2014 including best picture and boasts a 94% on Rotten Tomatoes. An insightful trip into the state of modern relationships and delving into humanities need for companionship.
So Long and Thanks for All the Fish: The fourth installment in the Hitch Hiker’s Guide to the Galaxy series. Our all-time favorite sci-fi adventure story. Few series are ever worth reading all the sequels for, Douglas Adams, has nailed it. Four books in, and this series is still just as hilarious and thought provoking as ever. If you’re looking for a laugh and an adventure look no further. And remember, always bring your towel, and don’t panic!
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