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Market Currents – 3/14/22


  • Invasion. Russia’s invasion of Ukraine in late February shocked the world, and is having a significant humanitarian and geopolitical impact.  Western nations are so far avoiding a direct military confrontation, responding instead with providing weapons and intelligence, and introducing heavy economic sanctions that seek to isolate Russia and cripple its economy.  A multitude of Western companies active in Russia are pulling back, and closing businesses in that country at least temporarily.


  • Energy Prices. Russia accounts for just about 2% of world GDP.  For many US corporations, there is little direct impact.  The bigger headwind, however, comes from the spike in prices of oil, wheat and other commodities.  Rising energy prices are exacerbating supply-driven inflation in the near-term.  This is particularly evident in Europe, where coal, electricity and natural gas prices have surged from already elevated levels.  Higher energy costs will adjust our daily behavior, and take a toll of growth.  The disruptions to Russian oil supply (for the moment, Russian gas is still flowing to Europe)  will eventually be replaced with other sources, but we suspect prices will likely remain elevated for longer on market tightness and uncertainty.


  • Inflation. Headline inflation will likely remain persistently high, with food and energy costs in particular set to rise further.  Because of their  visibility, gas prices tend to have an outsized influence on consumers’ perceptions of inflation and the economy.  A prolonged period of high gasoline prices, especially if it drags into the warmer months, will no doubt have a negative impact on discretionary spending.


  • US Economy. Outside of these events, the US economic picture has remained largely in good shape.  The most recent labor jobs report was a standout, with roughly 678,000 Americans finding jobs in February.  Since September, the economy has added jobs at an average pace of 615,000 a month.  Importantly, wage growth appears to be moderating as more workers are pulled in.  Household balance sheets are still strong, despite higher inflationary pressures.  Industrial activity remains fairly robust.


  • Central Bank. The Federal Reserve is widely expected to raise its benchmark interest rate rate by a quarter percentage point in its March meeting.  This would be the first rate hike in three years, as the central bank seeks to curb high inflation.  The rate hike is widely telegraphed, and will not catch the market by surprise.  Investors will be interested in the Fed’s “body language” around this hike as an indicator to set forward expectations for the Fed’s aggressiveness in the inflation fight.


  • Market Outlook. We think the ongoing geopolitical crisis is unlikely to have a quick ending.  The Ukrainian resistance is heroic.  In regions where Russia acquires military control, occupation is going to be difficult against restive civilians.  The impact of sanctions on Russia’s war effort will be longer-term in nature.  We think slowdown risks are rising, especially if gasoline prices remain high for a prolonged period.  Historically, global equities tend to recover from periods of armed conflict.  Longer-term, balance will get restored.  We suspect that the US, with its economy relatively intact and no kinetic war, might emerge as a favored destination for investor capital.