By M. Blake Fortune, II
This week, investors will be monitoring further developments out of Ukraine. In recent weeks, market participants have been processing new Covid developments, inflation, soaring commodity prices, interest rates and geopolitics. Have you been to the pump lately? Making matters worse, the media is sensationalizing the conflict and market pressures are being felt across the world. As Barron’s Randall Forsyth asserts, “To let you in on the sausage making, media outlets are obsessed with SEO- search engine optimization- to make it easy for Google and its ilk to pick up their stories and maximize clicks.” In other words, bad news sells. Known unknowns are bad for market participants.
The average price of a gallon of gas in the U.S. is approaching four dollars. While the U.S. imports a relatively modest amount of energy from Russia, there is one key import from Russia that the U.S. relies on- sour crude. Sour crude is used as a price setting commodity (i.e., gasoline grade and refining). Taking sour crude imports out of the picture could mean higher refining costs for domestic producers and, ultimately, higher consumer costs at the pump.
Inflation/ Interest Rates:
It is inevitable that the Federal Reserve will increase its benchmark rate over the next several months, on top of stopping its monthly purchases of treasuries and mortgage bonds. Prior to Russia’s invasion of Ukraine, federal funds futures were pricing in a 00.50% rate hike at its upcoming March meeting. Now, the market is pricing in a 00.25% increase. As the Federal Reserve begins its rate hiking campaign, it will need to consider supply chain disruptions, a tight labor market, and outside forces that are out of their control. Because of these new developments, we believe that the FOMC will hike rates more modestly than previously expected.
The effects of the pandemic seem to be fading in the U.S. As cities and states continue to roll back covid restrictions, we expect continued demand for leisure, travel, and entertainment. This sustained demand could help offset potential consumer cutbacks in other sectors of the economy.
We have been closely monitoring fixed income and treasuries as yields react to the ongoing conflict in Ukraine. With all the recent geopolitical unrest, US Gov’t bonds have been attractive cash alternatives. Short and long bond spreads are tightening, signaling investors remain cautious as the Fed begins its rate hike policy. Real yields are still deeply negative, and we believe that equities and real assets are still the most attractive asset class for investors.
The Bottom Line:
The market volatility will likely continue, and investors are finding few save havens. While the current state of the stock market remains erratic, staying focused on a long-term investment approach is fundamental to positive outcomes. Corporate earnings continue to impress, and the labor market remains tight. There is pent up demand for spending as we put Covid in the rear-view mirror. To put the recent pullback into the perspective, the S&P 500 is off 10% from its January record. Essentially, we have wiped out one quarters worth of gains. History shows that volatile times like these are but a blip in the investing journey and end up being great buying opportunities.
To contact the author of this story:
Blake Fortune at email@example.com