The current geopolitical events taking place between Russia, Ukraine, the U.S., and other NATO countries is creating quite a stir on media outlets and financial markets. As part of our ongoing efforts to keep Crown clients informed on events that impact the broad market, we wanted to send an update prior to the weekend.
On Thursday, the major stock indexes suffered one of their worst days of 2022 with the S&P 500 giving up 2.1%. While a Russian invasion into Ukraine would likely put downward pressure on stocks over the short-term, history indicates that markets bounce back in relatively short order in response to geopolitical events, according to CRFA and Truist research reports. The reality is that markets do not have a conscious, and only economic changes have a sustainable impact. Already elevated oil prices could see heightened volatility and pose the largest risk, but further impact should be muted.
While we do believe the market has overreacted to the Ukraine situation, there are other important factors that continue to put pressure on the market. Mainly, stubbornly high-inflation and the pending Fed response. Again, history tells us that as Fed tightening cycles begin, volatility increases initially and eventually normalizes, according to Bloomberg data and reports. So far defensive sectors like utilities and consumer staples are holding steady. Energy is outperforming. All other sectors are down for the year.
The good news is that the U.S. economy continues to show strength, largely due to strong consumer spending. We are 72% through Q4 earnings season and the results have been very positive with 77% of companies reporting earnings above expectations, according to FactSet. Growth stocks are not reacting as they have in the past. The reality is that market sentiment has shifted as the Fed’s policies change from stimulus to quelling inflation. Better days lie ahead as the Fed gets a few rate hikes under its belt, supply chain issues are resolved, and inflation eventually recedes.
We will continue to act accordingly and keep you informed. Enjoy your weekend!