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