Markets Have Down Week as War In Ukraine Enters Third Week
- The S&P 500 closed at 4,204.31 down from 4,384.65 last Friday. The VIX closed at $31.00. There was supposed progress in talks this morning, at least Putin said so, but the rally petered out and the index closed near session lows.
- The conflict in Ukraine continues to escalate and the humanitarian toll is mounting. Russia has retaliated against Western sanctions with export bans. The possibility of a Russian debt default is rising as well.
- CPI came in at 7.9% this week without the effects of Russia’s invasion on commodities being taken into account yet. This likely means that inflation will peak later than anticipated prior to the conflict.
- The breadth of commodities being affected by the current war is unprecedented in modern times. However, equity valuations are increasingly attractive and US equities have been a relative safe haven.
The Russo-Ukrainian War entered its third week and despite occasional glimmers of hope, events on the ground are increasingly grim. There is hope for resolution through peace talks, but Russian actions are increasingly alarming with regards to the use of indiscriminate bombardment. Also, today the Russians attacked a variety of targets in the West that had until now remained unscathed. The events are harrowing and our prayers are with all those affected by this war. Unfortunately, the longer this war goes on the more people it will effect given the centrality of Russia, Ukraine and Belarus’s role in the global commodities supply chain. The breadth of commodities affected is stunning. From energy, to food and fertilizer and to some metals necessary for clean energy the potential impact of a prolonged economic siege of Russia is prodigious. Stocks of many commodities were already low from elevated demand for goods versus during the pandemic.
This particular geopolitical event is creating a lot of uncertainty for good reason. Markets are making huge intraday swings since the conflict began and the prices of everything from natural gas to sunflower oil have skyrocketed. Broad commodity indexes are getting to levels not seen in decades. The level of the VIX doesn’t tell the entire story. The JPM Global FX Volatility is at its highest level since March 2020. Bonds stocks and even cash are all reeling in the face of the implications of the invasions and economic isolation of Russia and Ukraine.
Nonetheless, US equities are at increasingly attractive valuations. The other thing is that the VIX has been behaving in ways that have marked bottoms in the past. Also, oil has not yet reached levels where it will start to reach portions of the average consumer’s wallet that have been problematic for growth in the past. Earnings have begun to slow but corporate balance sheets are quite strong. Our Head of Research, Tom Lee, will discuss some data-driven reasons for hope that markets will finish the year strong, despite how it feels right now on a day-to-day basis.
If all this weren’t enough tapering has ended and the Fed will begin lift-off next week. Powell recently said before Congress that he expects to make steady 25 bps hikes but reserves the right to act more aggressively should he need to. Rate hike expectations have gone from almost certainly 50 bps in recent weeks to almost certainly 25 bps. Despite this, the two-year inflation break-even rates have moved from 3.25% to 4.25% since the war in Ukraine began. There’s not much monetary policy can do about shocks to commodity supply chains and jam-ups at ports.
Still, luckily there is also evidence that as inflation risk particular to the war in Ukraine is about to take off the kind from the abnormal pandemic consumptions patterns that was comprised of a higher proportion of good to services than normal seems to be alleviating somewhat, although it’s not clear if some of these problems will flare back up or not given what has been an increasingly escalatory path of events since the invasion began. Ships waiting at Long Beach have gone down. Shipping rate premiums have ticked down a bit as well. Russian activity was about .64% of all container activity in 2020 which means these trends shouldn’t be affected all that much.
On the positive front, despite a few stubborn states, COVID-19 is still fully retreating from the Omicron highs experienced at the end of 2022. Restrictions are being lifted in many placed. Masks and proof of vaccination are no longer required in many states and localities. US equities are still a good place to put your money in our opinion. We’re not sure when or how will the storm will end, it seems only one man, Mr. Putin, is the one with that information. But in this tragic manifestation of how centralized authority can be incredibly problematic for the world, the value of cryptocurrency has shown through.
It has enabled rapid transfers of wealth that have benefitted those in the direst of circumstances and when not even national currency can be trusted. The apolitical empowerment of individuals has not resulted in massive money laundering by the oligarchs but rather massive charity from the Western world to embattle Ukrainians. The Biden Administration’s statement on cryptocurrency this week seems to confirm that Western leaders are changing their tone on cryptocurrency. Our entire team realizes these are extraordinary times and that looking at the red screens can feel like a real punch to the gut. We always like to remind investors during times as tough as these for markets that Fidelity did a survey years ago and found their most successful retail accounts were, funny enough, investors who had merely forgotten they had accounts. In doing so, these lucky investors spared themselves from the emotionally-driven mistakes of those who checked their accounts frequently. For active managers, the rising dispersion may create opportunity for more alpha. Buckle up, the bumpy ride might not be over yet, but there’s reason to believe there’s light at the end of the tunnel.
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