Phase 1: Short Sharp Shock

Markets hate uncertainty, war and conflict certainly provide that. And while markets react quickly and usually down to news like this, they are short-lived. Additionally, markets are made of many different companies and commodities and several react positively in times of uncertainty. The market is resilient, and while near-term moves are disruptive, they don’t change the economics of the world.

Historically, markets shrug off geopolitical upheavals. More so in the last two decades. Removing the domestic attacks in New York and Boston total stock market moves on the heels of global conflict is less than 1% on average.

We are likely between 2 weeks and 3 months of a lack of clarity in the Russia/Ukraine invasion. The inflation expectations and federal rate hikes will have a larger impact on pricing in the market that window. Inflation will not be resolved in the short run and is being adjusted in the market. Also,  the rate hikes we expect will create volatility are running their course. These are more critical to the health of the markets than the whims of eastern European dictators. 

There is not a recession on the horizon, employment is too low, and demand is too high.= 

Phase 2, Russia is not economically important (neither is Ukraine)

Forgetting the fact that many of us have grown up on James Bond and his constant runs with the KGB, Russia is a 3rd world dictatorship with a limited capacity to alter global commerce and economics. Russia is a failed democratic state in eastern Europe (there are several to choose from) it just has a larger landmass than the others we can name. 

Russia is a large oil exporter, and Ukraine is 61st on that list. This may cause a spike in the near-term costs of crude as a result, but the economic size of these companies is small and limited in reach. I think people are too soon to forget, the last invasion of Ukraine by Russia was in 2014 (and they still occupy Crimea today).

While an oil spike has historically caused distortions in the equity markets. It also brings margins into several of the United States oil producers. But the OVX (oil volatility index) has moved from the low 40’s to the high 40’s, which is not a signal that oil traders are buying up the oil panic.  

Sanctions, particularly on those who do business with Russia post-invasion, will hamper those companies and countries. But few of them are not prepared for this event that has been weeks in the making. And very few of the SP500 companies, and our portfolio for you, have major exposures to eastern Europe.

Russia and its decisions to be “anti-western” and “anti-capitalist” have mitigated its ability to be an important economic center for almost my whole life (there was a brief window from 1991 to 1997 where it was possible, but that’s gone). Markets will move on from today’s press conference.

Phase 3, a Return to fundamentals

The actions of the FOMC are allowing markets to reprice risk and growth. And while this is causing a short-term drop in the multiples companies are trading at, it doesn’t change the underlying fundamentals of the economy. 

Labor inflation is here to stay, it is a stubborn number. But the by-product is more money in the hands of workers and the employed which is good for the economy. The inflation caused by supply chain issues will be corrected by the market in the near term. This means wages rise for the foreseeable future, but prices of products eventually come down (but not below pre-pandemic levels).

Fundamental investing is volatile, mostly because it is dependent on the earnings of specific companies and sectors which change. As we remove the nearly limitless supply of money coming into the economy, it will prove that some companies with wide, defensible margins, will survive and others won’t.

This is not a market for heroes! The last 3 years have produced +28%, +16%, and +26% in upside for equities, some pullback was inevitable. Fixed income is still not a great play. Bonds are selling off wildly, and the expectation that the Fed leaves this market will only accelerate the bond woes. Short duration and corporate bonds are the only suitable investments for fixed income and even those sectors will require a strong stomach. 

The fed will not be able to raise rates seven times in the next 18 months. There will be setbacks where rates are left to pause as markets get frustrated. Jerome Powell is a market-centric fed chair. He, and others, will adjust to accommodate capital markets.