Key Takeaways
- The S&P 500 closed 4,418.64 at 4,500.52 last Friday. The VIX spiked to $30 on Friday before receding to $27.36.
- The market appeared to be regaining some footing earlier in the week, and topped out at 4,587.18 on 2/9. Bullard’s Thursday comments along with the White House announcement of a potential imminent Russian of Ukraine led to selling.
- The much-anticipated CPI number also came in hotter than consensus, adding to the inflation anxieties. – Expectations for Fed tightenings jumped considerably in the wake of Bullard’s comments and all eyes are on an unscheduled Fed meeting on Valentines Day.
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Markets were down heavily on Friday but recovered some from their deepest point of losses going into the close. This selling was mostly prompted by the White House announcing the potential imminent invasion of Ukraine with what seemed like a deep sense of urgency. We’re not sure what’s going on in Vladimir Putin’s head by any means and we’re not discounting the possibility of an invasion, we will only remind our subscribers that most of the time geopolitical risks have a limited effect on the course of markets. Effects can be abrupt but are usually short-lived.
Just because markets tend to not price in geopolitical risk doesn’t mean the situation isn’t frightening. The fears around a Russian Invasion of Ukraine and potentially a significant ground war in Europe with tragic levels of casualties is no laughing matter. We’re not dismissing the risk by any means. It is not just the economic impact of the conflict itself that is problematic, which could interrupt Ukraine’s considerable contributions to global grain supplies, it is also the sanctions that would be imposed by Western countries in the event of such an action. Unlike 2014, Putin has $600 bn in reserves, ostensibly to help weather the consequences of the Western economic onslaught that is planned.
The Russian Ruble itself plunged to depths not seen since the height of COVID. What the United States is threatening is to block the Nord Stream 2 pipeline and also to cut off Russian access to SWIFT, essentially marooning them from the global financial system. The sanctions on Russia from their invasion of the Crimean peninsula and the Donbas region caused significant economic costs for the truculent country. However, Putin’s strategic goals of having a buffer between him in the West have been long-standing and well-supported by his regime. Europe is undoubtedly at a precarious moment, and our entire team is hoping for a peaceful resolution.
Energy prices, already high, would likely go much higher in the event of an invasion. There have been some green shoots in the data for those who believe inflation is peaking. A war would likely cause havoc in the supplies of energy, resulting in spikes in prices particularly of natural gas. Some have speculated the Russians could cut sub-sea broadband cables, but the intentions of Russian leadership have often been purposely opaque and very centralized. This makes speculation as to intent difficult. The only thing that is sure is that Putin has assembled a force that is ready to strike deep into Ukraine. Whether he uses it or not will only be clear with the passage of time.
CPI rose to the highest level since 1982 on Thursday morning’s reading. The number came in at a blistering level of 7.5% which was even higher than the 7.2% estimate. The US 10-YR spiked to above 2% for the first time since COVID on Thursday and on an intraday basis on Friday before settling to levels of 1.918%. After the inflation numbers, St. Louis Federal Reserve Governor Jeremy Bullard took a hawkish tone, saying he favored having a Federal Funds Rate of 1.00% by July. He opened up the possibility of a 50 bps rate hike in March and potentially even hikes between meetings. The last time the Fed did a hike between meetings was in 1994.
After his comments, a flurry of other Fed officials came out to publicly say they disagreed with this strategy and took a more measured tone. Nonetheless, even as the market appeared to find some footing then the Ukraine news came in. As we have mentioned there were many hurdles and obstacles for markets in 1H2022. We actually think that given the simultaneous convergence of two of them, markets handled themselves decently. There was selling and protection purchasing but it wasn’t a stampede into cash by any means.
We’ll remind you that during times when headline risks seem to be swirling around and markets are sensitive, it can be very hard to not put your finger on the sell button. Please remember that stocks ultimately are about earnings, and earnings are largely about economic strength. Is the market facing a significant amount of headwinds? Yes, it is. But let’s also remember that the US Consumer and Corporates are both much stronger than pre-COVID in terms of liquidity. Our Head of Quantitative Strategy, Adam Gould, did his 2022 Outlook this week. This was an excellent and informative event. Replay here. Also check out our Signal From Noise on our process for investing in The Rise of AI and Automation.
