Wentz Weekly Insights
Thoughts on the Markets and the Russia-Ukraine Conflict
U.S. equity markets continue to see volatility, this time from a new concern – Russia’s invasion of Ukraine. The uncertainty caused a correction (a pullback of 10% or more from recent highs) in stocks, the first one since Covid pushed stocks about 35% lower in March 2020. From the all-time high in the beginning of January this year to the low on Thursday morning the S&P 500 was down 14.6%, however ended the week down just 9.0% from January’s highs.
Everything is very fluid and in these types of situations is normal and sometimes uncomfortable to see this amount of volatility. With the additional intelligence, it appears Putin will not stop his push in Ukraine or slow down until Russia has overtaken the Ukrainian government and its capitol city Kyiv. But recent reports suggest Russia is being slowed by supply and logistic issues within its military, severe sanctions by a list of countries, and opposition by Ukraine which has helped prevent Russia advance as much as Putin thought it would. We still don’t expect this to be a global event with Ukraine being a non-NATO member, if it was this would be a different situation.
The question for the markets and investors is how will this continue to impact stocks and the U.S. economy. Like in other geopolitical events, the situation should not have a lasting impact on the US economy or the current trajectory of profits and as such we believe market concerns will ease. There already are many sanctions on Russia that will cripple its economy, but should not have a big impact on the global economy, especially in the U.S. To put things into perspective, Russia’s GDP is roughly $1.5 trillion, less than 2% of the global economy, and smaller than California’s economy, according to Raymond James. However, Russia supplies about 10% of the global crude oil supply and other commodities such as wheat and fertilizer, which is why we continue to believe the commodity market will be most affected and could put further pressure on inflation. The bigger question for U.S. markets now is does this change the path of Fed policy, which is expected to begin its rate hiking cycle in three weeks. Any pause or hold in rate increases will likely continue to “overheat” the economy and risk a “hard landing” where the Fed may have to be more aggressive later and possibly triggering a more severe recession. We are still a couple weeks away, but we still believe the Fed hikes rates as it understands it is well behind.
Regarding market performance in past geopolitical events, the pullbacks are typically short lived as investors tend to shrug off geopolitical events. Data compiled by Alliance Bernstein shows in the short-term markets will experience volatility and decline, with the average drawdown of 5%, but still recover in a matter of several weeks. The average return 3 months after the start of a conflict/war type event is +4.7% while the average return one year later is also +4.7%. On average, going back to 1980, U.S. stocks see a correction every year with an average intra-year decline of 14.0% and 75% of the time still finish the year positive. We say this because we want clients and investors to understand pullbacks like this are normal and happen more frequent than we realize and markets recover every single time. We also want to avoid making emotional decisions – data by JPMorgan shows those fully invested through market cycles average a 7.5% annual return, while those who miss just the 10 best days, which typically happen after the pullbacks, saw an annual return of just 3.35%. We stress staying patient and if our expectations or forecasts change, or if we see a need to make any changes, we will be sure to reach out. However, if you have any questions or concerns, or would like to talk to an advisor about the situation or your portfolio more in detail, please do not hesitate to reach out.
Week in Review:
Markets opened the holiday shortened week in the red after an increase in tensions between Russia and Ukraine. Due to the situation, President Biden announced new sanctions on Russia, targeting the financial systems in addition to sanctions on Russian elites and their families. The S&P 500 finished the day down 1.01%. Markets moved lower again on Wednesday with the S&P 500 falling into correction territory for the first time since the early days of the pandemic after a 1.84% decline on the day, with the NASDAQ and Russell 2000 nearing bear market territory (decline of at least 20%). Ukraine declared a state of emergency the same day while world leaders canceled meetings with President Putin. On Thursday things got more intense after reports Russia advanced on Ukraine after days of speculation and reports that an invasion was imminent. Reports came in of Russia moving into several cities and Ukrainians losing control of the Chernobyl nuclear plant. Stock markets around the globe opened deep in red territory over the reports while counties around the world continued to announce additional sanctions on Russia. U.S. stocks were down close to 3% in the morning before seeing one of the more remarkable reversals we have seen in recent memory. The NASDAQ was down as much as 3.45% in the morning, pushing it into bear territory, before reversing and closing higher by 3.34%, a 6.79% trading range. Oil saw big movements as well over concerns of global supply as Russia makes up approximately 10% of world supply. Jobless claims in the morning showed the lowest amount of individuals continuing claims since before the pandemic, new home sales cooled from December’s pace likely due to harsh weather in the month, and fourth quarter GDP was revised slightly higher. Concerns continued Friday as the Russian military moved into the capital Kyiv, but investors were able to shrug off the additional reports and move higher. Economic data in the morning showed personal income higher than expected, consumer spending higher than expected, with another inflation reading, the personal consumption expenditure price index which is the Fed’s preferred measure of inflation, showing a hotter reading than expected. The 10-year Treasury yield closed the week at 1.98%, oil managed to finished the week down 1.3%, while major U.S. indices finished as follows: Dow +2.51%, Russell 2000 +2.25%, S&P 500 +2.24%, and NASDAQ +1.64%.
Update on Tax Forms
- Clients with retirement accounts (traditional IRA, Roth IRAs, etc.) will be receiving TWO 2021 Retirement Tax Packages (this includes Forms 1099-R and/or 5498). Raymond James made a back-office change where Raymond James Trust Company of New Hampshire (RJTCNH) is the new custodian of IRAs (you and your accounts are unaffected by this change). This change became effective September 7, 2021 and as a result accounts that had reportable activity before and after the Raymond James custodianship change will be receiving TWO tax packages. Please take note the second package is not a duplicate of the first. All forms must be used when completing the 2021 tax return.
- The first package contains reportable activity occurring from January 1, 2021 – September 3, 2021, under the RJA custodianship
- The second package will contain reportable activity occurring from September 7, 2021 – December 31, 2021, under the RJTCNH custodianship.
For more information on when you will be receiving your tax documents, please refer to this email.
The Week Ahead
The calendar remains busy this week as markets continue to assess the conflict in Eastern Europe. President Joe Biden will delivery his State of the Union address on Tuesday evening. Fed Chairman Powell will be giving his semiannual testimony to Congress where he will discuss current monetary policy and the economy, which takes place Wednesday and Thursday. OPEC is expected to give an update on production quotas as well. On the economic calendar markets will be paying close attention to the employment report on Friday. After a January that well exceeded expectations, economists are expecting 350,000 job gains in February. Elsewhere on the calendar are manufacturing surveys as well as construction spending on Tuesday, weekly jobless claims, and the report on worker productivity on Thursday. Earning season continues with many more retailers reporting this week. Notable companies reporting include Workday and Zoom Video on Monday, Target, Kohl’s, AutoZone on Tuesday, Dollar Tree and Snowflake on Wednesday, Kroger, Best Buy, Costco, Broadcom and Marvell on Thursday.