While U.S. financial markets took a rest today, in honor of President’s Day, the tensions on the border between Ukraine and Russia heated up to a boil. Stock futures are down by more than five hundred points while money is flowing into the safety provided by gold and U.S. Treasury bonds.
As I write this commentary, news reports suggest Russia has moved troops into two separatist regions of Ukraine. In response to this news, stock futures here in the U.S. have turned decidedly lower ahead of tomorrow’s opening bell. There is no surprise that such a geo-political event like this would lead to a “risk-off” move by investors.
While stocks should open lower on Tuesday morning, here at KIG we are more interested in where stocks will be long term. The actions of the Federal Reserve, small business owners and investors will prove to matter more over the long term than regional conflict between two former Soviet states.
We do not discount the high stakes of military conflict involving Russia. However, markets have had weeks to digest the prospect of Russia ignoring threats of sanctions by the U.S. This should help to soften the volatility expected as this plays out. In the meantime, it is worth looking at the 2014 annex of Crimea by Russia and what markets did in days, weeks and months that followed.
As a refresher, Russia moved troops into Ukraine following the 2014 Winter Olympics. This occurred on February 27, 2014. Within weeks, Russia had successfully annexed Crimea. While the conflict between Ukraine and Russia has continued, it has remained a side show on the global stage, until now.
We will leave it to political scientists to tell us if the week following the Winter Olympics has special meaning to President Putin. For now, we will consider it a coincidence that the world is dealing with another Russia/Ukraine conflict almost 8 years to the day from the last one.
Looking at how stocks fared 8 years ago, the picture is not a discouraging one. Below is a look at the S&P 500 Index price change following February 27, 2014:
1 month: -0.3%
6 months: +7.9%
12 months: +13.5%
Through 2/18/22: +134.0%
Past performance does not predict future results.
With the recent rise in oil prices, let us look at how the price of oil (WTI Crude Spot) changed following February 27, 2014:
1 month: +/- 0.0%
6 months: +2.0%
12 months: -50.0%
Through 2/18/22: -20.0%
Past performance does not predict future results.
Financial assets may once again ignore the conflict between Russia and Ukraine. If they do, the reason might exist in the following economic statistics. In 2014, Russia was the ninth largest economy, as measured by GDP. Since then, it has not only dropped to 11th place, but the economy has declined in size, too. It now has an economy about the same size as Texas. This makes it a shadow of the former Soviet Union’s economy, just before the Berlin Wall came down in 1989.
However, Russia controls vast energy supplies that are important to Europe. This is the most important card Russia has in the deck as it plays political poker with the rest of the world. The days ahead will prove whether this time is different. For now, we will focus our attention more on Federal Reserve policy and corporate profits for U.S.-based companies to determine where stocks are headed.
Turning to the Federal Reserve, we expect the Central Bank to raise interest rates by 0.25% next month. They may raise rates further throughout the year, but we disagree with the view that seven rate hikes are ahead over the next several months. Our view is that the economy will begin to slow, the supply chain issues will subside, and the Fed will be content with three or four rate hikes before they hit the pause button.
Corporate profits should continue to impress. U.S. companies have done a terrific job of maintaining profitability and strengthening their balance sheets. The banking system is as strong as we have seen in decades. Household balance sheets remain strong which has recharged their “financial batteries”.
Three weeks ago, we alerted readers to our view that stocks will be volatile this year. The news out of Ukraine is just part of the volatility we expected for the year and nothing more. So, as markets work to digest the geo-political news out of eastern Europe, we remain calm.
Recession is coming for the U.S. economy, but not yet. We see this threat lying beyond the mid-term election and potentially deep into next year. Stock prices, while volatile, should push higher into the end of 2022. In the meantime, investors should remain patient. The underpinnings of the economy remain strong, COVID, as an economic hurdle, is fading and Spring is around the corner.
Sincerely,
Kessler Investment Group, LLC
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared in this presentation are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.