Weekly Market Update 2/28/2022
The level of anxiety among investors picked up as the final trading days of February unfolded. The jitters were prompted by Russian President Vladimir Putin’s decision to move troops into Ukraine. Russian recognition of two eastern regions of Ukraine as independent, followed by entry of the former’s troops, was regarded as a pretext for invasion by the North Atlantic Treaty Organization (NATO) allies. Stern condemnation from the United Nations Security Council and imposition of initial economic sanctions by the U.S. and Germany appeared unlikely to stop the Russian advance immediately.
The current and likely expanding sanctions against Russia will likely hurt its economy and may have farther-ranging consequences for the global economy. Germany’s Chancellor Olaf Scholz said his country will halt the certification of the Nord Stream 2 gas pipeline designed to bring natural gas from Russia directly to Europe. The price of crude oil jumped on this news.
The higher energy prices add to the ongoing inflation problem, which saw both January producer and consumer prices rise by levels not seen in four decades. This will make our central bank’s task of reining in inflation a bit more daunting in the coming months. The Federal Reserve will need to craft a less-accommodative monetary policy course, but at the same time be careful not to apply the brakes too hard and risk slowing economic growth. That said …
The Federal Reserve is set to commence a series of interest-rate hikes in an attempt to stabilize prices, beginning at its two-day Federal Open Market Committee meeting on March 15th. Inflation has skyrocketed over the last 12 months, as stimulus-driven demand and COVID-19 related supply chain disruptions and labor shortages have pushed prices notably higher.
Despite the very hot pricing data of late, bond yields have eased a bit. That is because nervous investors have sought the safety of fixed-income securities, as the global geopolitical tensions have intensified. The demand for safe-haven investments has pushed fixed income yields, which move in the opposite direction of bond prices, lower.
Conclusion: As we have suggested the last several weeks, this may be a good time, given the aforementioned events and increased market volatility, for investors to exercise some caution.