THE WEEK ON WALL STREET
Intensifying hostilities in Ukraine continued to unsettle markets, as investors
grappled with the war’s impact on the global economies. The Dow Jones Industrial
Average lost 1.99%, while the Standard & Poor’s 500 dropped 2.88%. The Nasdaq
Composite index fell 3.53% for the week. The MSCI EAFE index, which tracks
developed overseas stock markets, gained 0.90%.
MARKETS REMAIN STRESSED
Markets gyrated last week as Russia escalated its attacks on Ukraine, the U.S.
banned imports of Russian oil, and more companies announced the suspension of
business in Russia. Eastern Europe has added complexity to the Fed’s plans for
raising interest rates to manage accelerating inflation, which has been exacerbated
by a sharp rise in energy and other commodity prices. The stock market saw brief
moments of respite. Stocks rallied Tuesday on a news report that Ukraine would
promise not to pursue NATO membership, but lost momentum before the close.
Stocks rallied on Wednesday as oil prices tumbled, but were unable to follow-
through on Thursday and then faded further into Friday’s close.
A FOUR-DECADE HIGH
Consumer prices rose 0.8% in February as energy and commodity prices pushed
higher. This latest monthly report showed a year-over-year inflation rate of 7.9%,
the highest level since January 1982. Excluding the more volatile food and energy
prices, the 12-month increase was 6.4%, a slight bump from last month’s 6.0% year-
over-year increase. Many economists hoped that inflation pressures would ease, but
February’s inflation number suggested that the impact of sanctions and supply-
chain disruptions due to the invasion of Ukraine may likely feed further price
increases for the foreseeable future.
THE WEEK AHEAD: KEY ECONOMIC DATA
Tuesday: Producer Price Index.
Wednesday: Retail Sales. Federal Open Market Committee (FOMC)
Thursday: Housing Starts. Jobless Claims. Industrial Production.
Friday: Existing Home Sales. Index of Leading Economic Indicators.
THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS
Monday: Coupa Software, Inc. (COUP).
Thursday: FedEx Corporation (FDX), Dollar General Corporation (DG).
The markets continue to frustrate as bad news seems to be the only news at the
moment. I’ve been at this a long time now and I still get as frustrated as you when
the market just seems to continually grind in the opposite direction that I want it
to. However, I often reflect on Sir John Templeton’s timeless mantra that bull
markets are born on pessimism, grow on skepticism, mature on optimism and die
on euphoria. I’m pretty sure no one is euphoric about the markets right now. In the
absence of earnings, which have been good, the market tends to trade on news.
I read, a lot. I’ve seen the same story a couple of different times now about how
some $300 billion dollars of forced selling could be exacerbating the downside we
have seen in the market. As you know, Russia has been cut off literally and
figuratively from the rest of the world. Since the start of the Russian invasion of
Ukraine there has been a lot of selling in stocks. There are a lot of Russians who
have invested in our markets, along with large banks like Citi, JP Morgan, Chase,
etc., as well as some very large hedge funds and private equity shops, and some
mutual funds and fund companies like Fidelity and BlackRock. These funds who
have been doing business with the Russian oligarchs’ money are asking the funds to
leave their institutions before they are required to leave. This means these
companies and funds are doing mandatory redemptions of equities and bonds and
sending the Russians’ money back to them in cash or Rubles, I guess. In other words,
forced selling. It looks like at least $300 billion of selling in our markets and the
overseas markets. $300 billion is a very large number to say the least. This could be
why every time the markets rally just a bit we see the selling start to pick back
up. They are being forced to sell. Many institutions are in a bad situation and the
easy answer for them is to redeem the Russian money and return it to them. This
could be where a lot of downward pressure is coming from.
The big news this week will be what the Fed says on Wednesday when they hike
interest rates for the first time in a long time. The impending hike isn’t news, nor
has it been for months. We’ve known it is coming. Mortgage rates have gone up
almost a full point in the last few months based on the anticipation of rate
hikes. The Fed is raising rates to try and slow inflation, which has certainly picked
up. That tends to happen when you pour $2 trillion into the economy. The stimulus
was necessary in 2020. It was political in 2021. People seem to think the
Russia/Ukraine war is the catalyst for inflation, especially high gas prices. The
Russian incursion may be “the straw that broke the camel’s back.” However, the
saying goes that it wasn’t the last straw that broke the camel’s back, it was the 10,000
placed there before. Prices, including fuel, have been rising for over a year now for
a multitude of reasons. We’ve printed more money than necessary to fight Covid,
we kept interest rates near zero for too long and we hitched our wagon to the wrong
carts when it comes to energy independence. This country was exporting oil not all
that long ago, now we do not for political reasons. Energy dependence is a policy
mistake many nations will now be scrambling to rectify. Longer term, securing the
supply chain for items like microchips, medicines and rare earth minerals will
probably also become a national security issue.
Well, my high horse is tired and would like me to get off his back now. The U.S.
markets will hang on Powell’s every word this Wednesday and begin to speculate on
how much the next hike will be. There is a lot of negativity out there currently, but
I will leave you with this. This past weekend despite the news and high gas prices,
families took their kids to Disney World, they went to soccer, softball, baseball and
volleyball games, then went out to dinner at local restaurants. Americans across the
country went to Walmart, Target, Lowes, Home Depot and here in the south,
Publix and bought things they wanted or needed. The Amazon, UPS and Fedex
trucks were busy delivering eagerly anticipated items to those who ordered
them. My neighbors had a wedding in their back yard and I’m sure there were
weddings all across America. Imagine that, a bear market can't kill love. Ha. I’m
getting soft in my advanced years. So, families are being formed and doing what
they tend to do… grow, work and spend money. The consumer drives the economy
not CNN or Fox News. Yes, higher gas prices for a long time could shift where some
of that money is spent, but you are still going to be you and you are still going to
want to go out and do things. The human spirit tends to find a way even when it
seems like there might not be one. I can’t tell you what the market is going to do
next month, but I wouldn't bet against you.
Have a great week.