Weekly Economic Update: March 7th, 2022

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March 7th, 2022

The situation in Ukraine continues to be the driving force in financial markets. Commodity prices are spiking as much of the developed world applies economic sanctions against Russia. The S&P commodity index is up 41% YTD with crude oil and wheat up 54% and 48%, respectively. Over the weekend, Visa and Mastercard decided to suspend their payment processing services in Russia. In addition to those companies that operate in industries subject to sanctions, many other companies are electing to suspend service voluntarily. The global economy is more interconnected than ever before. As a result, the economic sanctions being imposed on Russia seem likely to have a more significant impact than those imposed in the past.

 

It has been 11 days since the invasion began on 2/24, and the S&P 500 is currently 5% above the lows of that morning. The path forward for equity markets in the near-term will be dependent headlines coming out of Ukraine. Longer-term, this is likely an opportunity for those who can look past the headlines. Investor sentiment has been extremely negative for much of the year. Individual investor (top left) and investment manager sentiment (top right) are near the level they reached during the COVID crash. Additionally, the VIX is currently above 30 (bottom left) and the Fear & Greed index (bottom right) is indicating extreme fear.

 

Stocks tend to rally when investor sentiment is at its worst. Once we get past the immediate fear of escalating military operations, history suggests the market will likely move higher. Keep in mind, the current situation is still in its infancy. The current conflict started just two weeks ago, and it has been 42 days since the stock market peaked on January 3rd, the first trading day of 2022. Below is a longer-term view of drawdowns for the S&P 500 and the number of days between all-time highs.

 

It is important to make a distinction between those drawdowns that coincide with a recession in the US and those that do not. In the above, instances with red numbers occurred during recessions, while those in black occurred during expansions. Both the 2000 Dotcom Bubble and the 2008 Financial Crisis were recessions that resulted in long periods between all-time highs. Given that last week’s jobs report showed the US economy added 654,000 new jobs in February, a recession in the near-term seems unlikely.

We feel it is also important to look more closely at the period during the first Gulf War (1990 and 1991), as there are some similarities to today’s conflict. The primary one is the impact on crude oil supplies and prices. Anyone who has visited a gas station over the last week has noticed prices moving higher. As previously mentioned, crude oil prices are up 54% already this year. During the Gulf War, we also witnessed a rapid rise in oil prices, from a low of $15 per barrel before the conflict to $40 during Iraq’s occupation of Kuwait. In the below, we show the price of crude oil (top pane, black), and the drawdown experienced by the S&P 500 (bottom pane, red). We also indicate several key dates with vertical lines:

  1. August 2nd, 1990 – Iraq invades Kuwait
  2. January 16th, 1991 – First US-led airstrikes against Iraq
  3. February 24th, 1991 – US-led ground forces invade Iraq
  4. February 28th, 1991 – Cease-fire announced

It’s worth noting that the peak in crude oil prices, and the low for the S&P 500, occurred in the middle of the crisis. By the time a cease-fire was signed, crude was back below $20 per barrel and the S&P 500 had completely recovered its losses. The time between the initial invasion and cease-fire was roughly seven months.

While the initial impact on crude prices is similar to the Gulf War, we also have to recognize the current situation is very different. Most notably, the aggressor in this conflict is a nuclear power, which makes the entire situation far more delicate. We are hopeful that a diplomatic solution can be reached soon but recognize that this could take months to be resolved.

This is not the time to make wholesale changes to investment strategies. History has shown the impacts of geo-political events tend to be short-lived and tend to reverse before the event is resolved. If the US economy can avoid a recession, it is unlikely that this is the beginning of a prolonged bear market for stocks like we saw in 2000 or 2008. We will be watching leading economic data closely over the coming weeks/months to assess the impact that surging crude oil and gas prices have on the economy.

 



T I P   O F   T H E   W E E K

 


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THE WEEK AHEAD: KEY ECONOMIC DATA

Wednesday: JOLTS (Job Openings and Labor Turnover Survey)

Thursday: Consumer Price Index. Jobless Claims.

Friday: Consumer Sentiment.

Source: Econoday, March 4, 2022

The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.

 

THE WEEK AHEAD: COMPANIES REPORTING EARNINGS

Tuesday: Guidewire Software, Inc. (GWRE).

Wednesday: Asana, Inc. (ASAN).

Thursday: JD.com, Inc. (JD), Ulta Beauty, Inc. (ULTA), DocuSign (DOCU), Rivian Automotive, Inc. (RIVN).

Source: Zacks, March 4, 2022

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Companies may reschedule when they report earnings without notice.

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Q U O T E   O F   T H E   W E E K

 

“Life shrinks or expands according to one’s courage.”
ANAÏS NIN

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T H E   W E E K L Y   R I D D L E

There is a word (four letters long) that begins with the letter I. If you put the letter A at the front of this four-letter word, it becomes a five-letter word which is pronounced exactly the same. Name both words?

LAST WEEK’S RIDDLE: You have a can of soda in your hand and someone tells you to drink the bottom half of it first. How can you do that?
ANSWER: Use a straw

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SteelPeak Wealth –

Institute of Portfolio Management

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CITATIONS:
  1. The Wall Street Journal, March 4, 2022
  2. The Wall Street Journal, March 4, 2022
  3. The Wall Street Journal, March 4, 2022
  4. The Wall Street Journal, March 2, 2022

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