It seems like nothing is making much sense these days. Just as the latest Covid variant began to subside (and inevitable cases of the next in line began to appear), Russia invaded Ukraine and changed the global focus. Though Covid is still an ongoing concern—with new flare-ups in Hong Kong and South Korea—the virus that changed everything isn’t getting much press time these days.
The US could see the virus death toll top 1 million this month—the defacto second anniversary of Covid’s deadly domestic bloom—and yet all eyes are on Ukraine. In recent days, Russian forces have shelled nuclear power facilities, deliberate rocket attacks have voided temporary ceasefires, and eliminated more opportunities to evacuate Ukrainian civilians from hot spots in the escalating conflict.
Russian Z: State of Play
Troop and transport movements out of Russia and toward or into Ukraine show telltales of the sanctions enacted against the Putin regime in response to the invasion. Russian civilian vehicles, marked with the hastily painted Z that has become the cryptic mark of wartime material deployed by Russia in this conflict.
These “civilian” vehicles, mostly trucks and buses, are likely an attempt by Kremlin strategists to obscure fuel resupply efforts—but could also signal surprisingly desperate maneuvering. With reports of “stalled” Russian convoys many kilometers from active theaters of combat and mounting Ukrainian victories in an unyielding war of attrition against the invaders, it’s clear things are not going well for Russia.
It’s uncertain if these erstwhile civilian trucks are meant as decoys (as Ukrainian forces have become adept at disrupting military resupply convoys) or replacements sent in place of regular military vehicles. If the latter, the asset-freezing sanctions placed on Russia may be taking a bigger bite than expected. If the nation no longer has sufficient funds to repair and refit existing military equipment, the sanctions may well end the war. Again, not much is clear or makes sense.
Market Down 12%, Now What?
The only sure certainty is upheaval in global financial markets. The Standard & Poor’s 500 fell over 3% by the end of February, the second straight month that the index has recorded losses. Though the decline may be cumulative, it’s been a bumpy ride down, with daily volatility jackhammering the S&P up or down every other day.
This is the same S&P that started 2022 near bright and blustery all-time high. That post-holiday glow didn’t last long, as market corrections knocked the benchmark down by almost 12% year-to-date by late February—before the subsequent losses caused by market reactions to the war in Ukraine.
The correction erased nearly all of the gains of the previous months, and investors who had hoped global markets were finally settling down in the wake of the worst (one hopes) of Covid are again panicking, but this time over a different crisis.
The ill-conceived and widely condemned Russian invasion of Ukraine has created a new locus for investor worry, but it isn’t just these aggressions fueling bearish moves. Savvy investors who understand the likely long-term effect of the sanctions against Russia already have an eye on factors like increasing inflation, interest rate adjustments, and a flatlining growth estimate for the global economy.
Not all growth has been negative. Oil prices have surged to a seven-year high, gold prices have spiked in response, and the 10-year Treasury yield has climbed out of its pandemic slump. All this while professional investment managers scramble to understand the potential for sustained effects of the economic upheaval caused by the war and the responsive sanctions.
Fed Hikes Rates, More To Come?
Investors will doubtless stay tuned to the shape these as-yet unplumbed changes are likely to take, but they’ll be distracted by the just delivered Federal Reserve semi-annual policy report and the upcoming re-convention of the Federal Open Market Committee.
Analysts and traders were right to expect the FOMC to raise interest rates by 0.25%. Concerns over future hikes could add yet more uncertainty and volatility to a global stock market already fluttering in the winds of war.
The Fed has indicated plans to curb inflation—currently sitting at a 40-year high—by raising interest rates. This will likely cause more uncertainty, leading to more volatility, and even veteran analysts will have difficulty discerning the signal-to-noise ratio of this feedback loop. The Consumer Price Index released on March 10th didn’t grant much stability to this mess.
The Ides of March Loom
Though nothing is clear, all may not yet be lost. The Russian and Ukrainian economies, both reeling from the effects of the war and resulting sanctions, are quite small in a global sense. The relative ruin of these two nations’ economies may not have much knock-on effect (other than higher fuel prices and all that goes with that). History hints that the US stock market could bounce back faster and harder than most assume.
March is always middling territory for domestic US financial markets—the average S&P 500 gains have been 0.5% in the blustery month as far back as 1928. When traditional US economic competitors have suffered downturns, US holdings have generally increased as wary foreign investors (perhaps including some chagrined oligarchs) look for more stability.
As the Ides of March loom, forecasts of Caesar’s death may be exaggerated. Many US retailers will release their quarterly earnings reports later this month, possibly giving many investors the impetus to push stock prices higher. While the war rages on, not much can be assumed, but stocks—despite the uncertainty, volatility, and just plain strangeness going on all around—have started to rebound. If the Wall of Worry persists, and sentiment remains bearish, it’s just possible they could surge higher from here.
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