​The Markets
 
Last week, Russia invaded Ukraine.
 
Russian President Vladimir Putin’s decision ignited the biggest military conflict in Europe since World War II. The war is already exacting a terrible human toll. It has also disrupted global markets and raised questions about the potential economic impact on Russia, Ukraine and the rest of the world.   
 
The Russia Trading System (RTS) Index, which is a gauge of the Russian stock market, dropped 38 percent early last week, although “financial markets partially recovered during Friday’s session…as traders assessed a wave of sanctions imposed by western powers that spared the country’s energy sector on which other parts of Europe are strongly dependent,” reported Robin Wigglesworth and colleagues at Financial Times (FT).
 
Major stock indices in the United States, Europe and Asia declined sharply at the start of last week, too. Some U.S. stock indices experienced corrections, meaning they moved 10 percent lower than recent highs. While corrections are unpleasant, they’re not uncommon and they can help wring excess from frothy markets, reported Stan Choe of Associated Press (AP).
 
Last week’s drop was jolting, but major U.S. indices recovered to finish the week higher. European and Asian indices recovered some losses but finished the week lower. The RTS ended the week significantly below where it started.
 
Will the Federal Reserve Change Course?
One reason for the quick recovery in U.S. markets may have been related to the Federal Reserve. Avi Salzman of Barron’s wrote that some investors “are clearly betting that the Federal Reserve will slow its tightening in response, giving riskier assets a chance to rise more.”
 
Not everyone shares that perspective. Colby Smith and Caitlin Gilbert of FT reported, “Despite the sharp escalation in geopolitical tensions, market expectations for the future path of Fed policy have not wavered significantly, with six quarter-point rate rises still penciled in for this year. While several Fed officials have since acknowledged potential economic costs tied to Russia’s attacks, they appear steadfast in their plans to withdraw monetary support.”
 
Will China Follow Russia’s Example?
Governments and investors are also keeping an eye on China. The world’s response to Russia, “may affect how Chinese President Xi Jinping does or doesn’t proceed with reclaiming Taiwan, which is much more critical to the global supply chain and thus the U.S. economy and financial markets,” wrote Lisa Beilfuss of Barron’s. “Taiwan’s domination of semiconductor manufacturing is particularly notable at a time when the global chip shortage is one factor behind the everything shortage.”
 
Beijing has long held that democratically governed Taiwan is part of China, reported Yimou Lee and colleagues at Reuters.
 
Your Portfolio and Your Financial Goals
The war in Europe will have far-reaching consequences, many of which remain unclear at this point. As a result, markets are likely to remain volatile. While current market conditions may be nerve-wracking  for investors, history has shown that selling out of fear, while markets are down, is a poor way to grow assets.
 
A better choice is to focus on whether your portfolio aligns with your financial goals. If last week’s gut check left you with concerns about risk, give us a call. We’re happy to review your portfolio with you and see whether changes are needed.

The Markets
 
Investors’ appetite for risk diminished as the Russian threat to Ukraine intensified.
 
Volatility was high last week as investors guessed and second-guessed how markets would react if Russia invaded Ukraine and sanctions were imposed on Russia. They also wondered what would happen if Russia pulled back. The questions are difficult to answer. Adam Samson, Valentina Romei and Matthew Rocco of Financial Times reported:
 
“Economists can at least attempt to predict the outcome of central bank decisions by building models based on data, commentary from officials and historical precedent. But the outcome of the stand-off between Russia and the west is a type of so-called tail risk that could have major implications for the global economy, yet cannot be easily or accurately modelled. The sense of uncertainty has begun creeping into financial markets.”
 
Heightened geopolitical tension wasn’t the only concern for investors. They also contemplated whether the Federal Reserve (Fed) can tame inflation without hurting economic growth. The Fed is expected to continue to tighten monetary policy by raising the Fed funds rate in March, and reducing its balance sheet throughout 2022, reported Davide Barbuscia of Reuters.
 
Uncertainty about how markets would react if Russia invaded Ukraine caused some investors to favor safe-haven investments. As a result, last week:
 

• Treasury rates moved lower. Normally, a pending Fed rate increase would push interest rates higher. Last week, however, the yield on benchmark 10-year Treasury notes dropped below 2 percent as investors sought safe havens.

 

• Gold prices moved higher. “After surging in 2020, [the price of gold] has essentially traded sideways for the past 18 months... Now it’s on the move…Gold is often thought of as protection against inflation, but it’s really protection against chaos—and the situation in Ukraine certainly counts as chaos. That has helped push the price of gold up 5.8% in February,” reported Ben Levisohn of Barron’s.

 
Major U.S. stock indices moved lower last week and came close to correction territory, reported Barron’s. Corrections occur when assets, indexes, or markets decline by 10 to 20 percent. When the market corrects it is not a pleasant experience, but corrections are not unusual. It’s likely markets will remain bumpy in the coming weeks. 

The Guidance Wealth Office will be closed on Monday, February 21st, in observance of Presidents Day.

 The Markets
 
Why did stock markets in the United States finish the week lower?
 
If this were Jeopardy, acceptable answers to that question might include: 
 

• Rising inflation. Major U.S. stock indices were trending higher until the Consumer Price Index (CPI) Summary showed inflation at a 40-year high. Consumer prices overall were up 0.6 percent in January with seasonal adjustment, and 7.5 percent over the last 12 months without seasonal adjustment, according to the U.S. Bureau of Labor Statistics. U.S. stocks sold off sharply on the news before regaining lost ground.

 

• Changing Federal Reserve rate-hike expectations. After the inflation report was released, St. Louis Fed President James Bullard indicated that he would like to see the Fed funds rate rise rapidly to fight inflation, reported Lisa Beilfuss of Barron’s. Investors recalibrated their expectations and by the end of the week the probability of a 0.50 rate increase in March was at 94 percent, according to the CME FedWatch Tool.

 

• Flattening of the U.S. Treasury yield curve. Expectations for more aggressive Fed actions rolled through bond markets last week. The yield on benchmark 10-year U.S. Treasuries rose above 2.0 percent, before finishing the week at 2.0 percent. The yield curve flattened as 2-year Treasury yields rose more sharply, finishing the week at 1.5 percent.

 

• Escalating geopolitical tensions. Then again, the culprit behind U.S. stock market performance last week could be expectations that Russia will invade Ukraine and start a war.  “Investors can’t blame rising prices for Friday’s plunge. Markets were poised to end the week higher, despite a hotter-than-hoped-for inflation reading on Thursday…Escalating geopolitical tension was the first problem Friday. Both the United Kingdom and the U.S. suggested that Russia could soon invade Ukraine and advised their citizens to leave the country… the news injected a rush of uncertainty into the market. And investors really hate uncertainty,” reported Al Root of Barron’s.

 

• Declining consumer sentiment, especially among the wealthy. Consumer sentiment dropped 8.2 percent from January to February, reaching the lowest level in a decade. Notably, “The entire February decline was among households with incomes of $100,000 or more; their Sentiment Index fell by 16.1% from last month, and 27.5% from last year. The impact of higher inflation on personal finances was spontaneously cited by one-third of all consumers,” reported Surveys of Consumers Chief Economist Richard Curtain. It’s possible that consumer pessimism will slow demand for goods and that, in turn, could help lower inflation.

 
The reality is that there often is no single answer to explain why stock markets move up or down. Each of the above may have contributed to last week’s downturn. There is currently tremendous uncertainty about the potential impact of Fed policy changes, war in Europe, and other issues. As a result, it’s possible markets will remain volatile in the weeks ahead.

​The Markets
 
A rosy view through the rearview mirror.
 
To say that economists did not have great expectations for the January employment report might be understating their position. It was widely believed that the spread of the COVID-19 Omicron variant would translate into a dismal jobs report. It didn’t.
 
“After some estimates called for U.S. payrolls to decline by as much as 400,000, the labor market shockingly added that many jobs in January – and then some,” reported Olivia Rockeman of Bloomberg.
 
The United States added 467,000 jobs in January, and the numbers for November and December were adjusted upward, too, by more than 700,000, reported the Bureau of Labor Statistics.
 
The U.S. unemployment rate ticked up to 4.0 percent as labor force participation rate – the number of people working or actively looking for jobs increased. The change in participation reflected updated population estimates in the household survey based on U.S. Census data that boosted the population of 35- to 64-year-olds and reduced the number of people age 65 and older.
 
The jobless rate among those seeking employment was 3.4 percent for White people, 3.6 percent for Asian people, 4.9 percent for Hispanic people, and 6.9 percent for Black people. Teenagers had the highest unemployment rate at 10.9 percent.
 
Signs of the economy’s strength during the fourth quarter also showed in company earnings reports. Earnings reflect a company’s profitability. With 56 percent of the companies in the Standard & Poor’s 500 Index reporting fourth quarter earnings so far, “The index is reporting earnings growth of more than 25% for the fourth straight quarter [of 2021] and earnings growth of more than 45% for the full year,” reported John Butters of FactSet.
 
The jobs and earnings reports paint a picture of robust economic growth in the United States, despite supply chain issues and pandemic variants. Robust economic growth often is accompanied by rising demand for goods and that can push inflation higher, reported Investopedia.  In 2021, U.S. inflation rose 7 percent, which is well above the 2 percent target set by the Federal Reserve (Fed), reported Christopher Rugaber of AP News.
 
Last week’s jobs report likely reinforced the Fed’s commitment to pursue less accommodative monetary policy in 2022. Fed rate increases make borrowing more expensive, which cools economic growth and brings inflation into line.
 
Major U.S. stock indices moved higher last week, according to Ben Levisohn of Barron’s. The yield on 10-year U.S. Treasuries finished the week higher.