Market Monitor: February Update
Headlines and Highlights
- Markets hold steady amid Ukraine conflict; energy jumps: Russia’s invasion of Ukraine sent the U.S. stock market briefly into its first correction (10% drop) in two years and sent energy and commodity prices higher. While oil prices have continued rising to an 11-year high of $113 a barrel, U.S. stocks have moved higher since the February 24th outbreak of war and international stocks are little-changed. Most asset classes ended February lower, but the market outlook improved significantly by month’s end with U.S. economic activity picking up as Omicron faded and related restrictions began being lifted.
- West imposes unprecedented sanctions on Russia: The United States and its allies applied a series of harsh sanctions aimed at isolating Russia’s economy and financial system following its attack on Ukraine. G7 nations along with the European Union froze assets belonging to President Vladimir Putin and other Russian officials, expelled Russian banks from the international bank payments system SWIFT and moved to “paralyze” the assets of Russia’s central bank, likely pushing the Russian economy into a severe recession. The ruble plummeted in value and Russia’s stock market was forced to close.
- Consumers keep spending despite inflation at multi-decade highs: The Federal Reserve’s primary inflation gauge, the core personal consumption expenditures price index, rose at a 39-year high of 5.2% in January compared with a year earlier. Consumers appeared to shrug off higher inflation as spending accelerated faster than expected, rising 2.1% over the same period.
Selected Market Returns
- While much uncertainty exists concerning Russia’s invasion of Ukraine, we remain confident in our positioning and recommend that clients remain invested at target allocations. The ultimate length of the conflict is unknowable, but history suggests a bounceback will be rapid and strong when it starts. The long-term outlook for markets in 2022 is little-changed from before the invasion.
- The Federal Reserve will stay the course with its plan to raise interest rates in a cycle to begin following its March 15-16 meeting. Chances of an aggressive (50 basis points) initial rate increase this month appear to have dissipated because of the war, however, and Fed Chair Jerome Powell confirmed Wednesday that he would seek a 25 bps increase this month. We expect the Fed to remain data-dependent as it plans each rate increase, pausing as needed to avoid putting undue strain on the economy.
- Inflation remains a prime concern given that the war and related sanctions are likely to keep energy and commodity prices high as well as extend supply-chain issues and other inflationary pressures. We still expect inflation to gradually come down over the course of the year starting this spring, but it is unlikely to return to the Fed’s preferred 2% target in the next 12 months.
- A recession remains unlikely in 2022, particularly with COVID-19-related constraints easing as the coronavirus’ grip on the global economy loosens. The U.S. economy remains solid and has limited direct vulnerability to the conflict – only 1% of S&P 500 companies’ revenue derives from Russia and Ukraine – and corporations and households are in stronger financial shape than they were before the pandemic.
- Stocks usually take geopolitical shocks in stride over the medium to longer term. Market drawdowns in such events average about 5%, with recovery taking less than two months, according to data compiled by LPL Research.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice