Key Takeaways
- The S&P 500 closed at 4,384.65 up from 4,348.87 last Friday. The VIX closed little changed from last Friday at $27.59 well under the levels it peaked at on Thursday AM.
- Markets had the best day of 2022 so far after their prodigious reversal on Thursday. New EU and American sanctions against Vladimir Putin announced before close.
- Despite the shock to markets and much of the world at the events of Thursday, there wasn’t a flee to safety assets you might expect.
- Commodity prices spiked on news of the invasion then retreated Friday. Brent breached $100 for the first time since 2014, but was just above $98 on Friday. Nasdaq gains lagged the Dow and S&P.
_________________________________
Russia invaded Ukraine Thursday morning beginning with air and missile attacks. Russian troops poured over the border from three sides and special forces and paratroopers attacked key points. By Friday afternoon fighting was raging on the edges of Kyiv, Ukraine’s capital. Ukrainian resistance has so far proved more effective than some feared but US intelligence officials still have stated they fear the capital could fall within days. Nonetheless, the Ukrainian government led by President Zelesnsky remains defiant and is arming citizens to prepare for an urban insurgency. The Russian stock market cratered and borrowing costs soared. There was a huge demand at ATMs and Russian nationals also protested the war in the street. Hundreds were jailed. It is unclear if this will have any effect on the Russian leader’s decision-making. Russia has floated the ideas of talk with Ukraine, but it is unclear whether these will materialize at this point.
The US imposed sanctions on Putin and Russian Foreign Minister Lavrov shortly after the EU did the same. So far, the sanctions that would most hurt Russia, but would also hurt Europe because of their energy interdependence. These may end up being implemented in the event Russia continues to escalate violence. Putin gave some comments about the Ukrainian military hiding equipment in civilian areas. Some interpreted this as a potential justification to attack civilian areas. Hopefully, this is not the case, but if it is, the sanctions will likely continue to escalate.
Despite the terrible situation ongoing in Ukraine, markets have orchestrated an amazing rally. Our Head of Research, Tom Lee, predicted before the invasion that once it started the historical precedent was for markets to “sell the run-up and buy the invasion.” He will elaborate on this below. We also did a Signal From Noise last night on some of the issues associated with the invasion and five stocks we like for rising geopolitical tensions. You can find it here. Also, check the recent update to Brian’s Dunks.
The bounce Thursday and the follow-up Friday was very positive in Our Head of Technical Strategy, Mark Newton’s, opinion. He believes there is definitely a high chance that some of this could be given back and re-test was possible, but Thursday morning could have marked a short-term bottom. Be sure to check out his superb technical analysis which is incredibly important during times of great uncertainty.
A little more than eighty years ago the scenes of families and neighbors huddling in Subway cars to avoid aerial attacks and rockets were not occurring in Kyiv and Kharkiv but in London, England. However, the market bottomed in June 1940 before the Blitz began. British stock markets were able to go up through all those military defeats and the ruinous bombing of their urban centers. Also, stocks only went down around 6% during the Cuban Missile Crisis. One of the more problematic geopolitical events was the Yam Kippur War and the associated oil embargo. Hopefully, this crisis does not end similarly. Markets are forward discounting and how they price risk in this area is difficult to discern.
This is a scary time and markets could experience more choppiness. If escalation continues cyber warfare could end up having a real effect on commerce. Supply chain issues will likely be exacerbated. The high-yield bond market has been showing some signs of cooling, but not panic. New supply was only $32 billion YTD down from nearly $84 billion through the same period in 2021. This indicates that money may be flowing out of fixed income and into areas like hard assets or real estate and high-quality equities. This is very consistent with the work our research team has recently done on TINA and the hypothesis that much of the household wealth in bonds, about $50 trillion, will be flooding into equities, hard assets and we believe cryptocurrency as well. The Federal Reserve’s task to tame inflation is undoubtedly made more difficult by geopolitical tensions. However, we still view it as most likely that they will do a 25 bps in March. Some Fed comments since the invasion have been non-committal. Technology rallied hard on Thursday and Friday, although the Nasdaq lagged the gains of the other major indices. The Dow was up over 800 points. However, let’s remember that the last six times the Fed hiked, the market was positive a year later. Markets have taken a pretty big hit and the high P/E stocks have often been amongst the hardest hit. The future is always uncertain and this situation in Ukraine is very disturbing and could produce volatile outcomes, for now, though it appears markets have chosen to “buy the invasion.”