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Key Points for the Week

  • Markets rallied from post-Ukraine-invasion lows on news the initial sanctions against Russia were less severe than expected and didn’t target Russian energy exports to Europe.
  • Core PCE (Personal Consumption Expenditures) inflation rose 0.5%, confirming inflation remains a challenge for the U.S. economy.
  • Strong fourth quarter earnings and a decline in stocks have pushed valuations lower and brought the indexes back down to a more reasonable P/E level.

Last week, Russia invaded Ukraine.

Russian President Vladimir Putin’s decision ignited the biggest military conflict in Europe since World War II. The war is already exacting a terrible human toll. It has also disrupted global markets and raised questions about the potential economic impact on Russia, Ukraine and the rest of the world.

The Russia Trading System (RTS) Index, which is a gauge of the Russian stock market, dropped 38 percent early last week, although “financial markets partially recovered during Friday’s session, as traders assessed a wave of sanctions imposed by western powers that spared the country’s energy sector on which other parts of Europe are strongly dependent,” reported Robin Wigglesworth and colleagues at Financial Times (FT).

Major stock indices in the United States, Europe and Asia declined sharply at the start of last week, too. Some U.S. stock indices experienced corrections, meaning they moved 10 percent lower than recent highs. While corrections are unpleasant, they’re not uncommon and they can help wring excess from frothy markets, reported Stan Choe of Associated Press (AP).

Last week’s drop was jolting, but major U.S. indices recovered to finish the week higher. European and Asian indices recovered some losses but finished the week lower. The RTS ended the week significantly below where it started.

Will the Federal Reserve Change Course?

One reason for the quick recovery in U.S. markets may have been related to the Federal Reserve. Avi Salzman of Barron’s wrote that some investors “are clearly betting that the Federal Reserve will slow its tightening in response, giving riskier assets a chance to rise more.”

Not everyone shares that perspective. Colby Smith and Caitlin Gilbert of FT reported, “Despite the sharp escalation in geopolitical tensions, market expectations for the future path of Fed policy have not wavered significantly, with six quarter-point rate rises still penciled in for this year. While several Fed officials have since acknowledged potential economic costs tied to Russia’s attacks, they appear steadfast in their plans to withdraw monetary support.”

Will China Follow Russia’s Example?

Governments and investors are also keeping an eye on China. The world’s response to Russia, “may affect how Chinese President Xi Jinping does or doesn’t proceed with reclaiming Taiwan, which is much more critical to the global supply chain and thus the U.S. economy and financial markets,” wrote Lisa Beilfuss of Barron’s. “Taiwan’s domination of semiconductor manufacturing is particularly notable at a time when the global chip shortage is one factor behind the everything shortage.”

Beijing has long held that democratically governed Taiwan is part of China, reported Yimou Lee and colleagues at Reuters.

Your Portfolio and Your Financial Goals

The war in Europe will have far-reaching consequences, many of which remain unclear at this point. As a result, markets are likely to remain volatile. While current market conditions may be nerve-wracking for investors, history has shown that selling out of fear, while markets are down, is a poor way to grow assets.

A better choice is to focus on whether your portfolio aligns with your financial goals. If last week’s volatility left you with concerns about risk, give us a call. We’re happy to review your portfolio with you and see whether changes are needed.

This Week in the Markets

U.S. stocks rallied after Russia invaded Ukraine on Thursday. The news that the initial sanctions wouldn’t target Russian energy exports to Europe reduced concerns about a European economic slowdown. While global markets declined last week, the U.S. finished higher even though the S&P 500 moved by more than 1% on all four trading days.

U.S. economic news continued to affirm a trend toward higher inflation and robust spending. PCE inflation rose 0.6% in January, and core inflation, which excluded food and energy, jumped 0.5%. Strong demand in the goods sector remains a source of inflation. Goods inflation rose 1%, and goods consumption leapt 5.2%. Services spending rose 0.5%.

Other economic data suggested the U.S. economic recovery remains healthy. Manufacturing and services PMIs increased, showing more firms are expanding. Home sales slowed even though the number of homes sold that are not yet under construction jumped higher. Business investment remained strong, growing 0.9%. That is positive news because investment in new technology is a tool to fight inflation.

The S&P 500 recovered while the MSCI ACWI declined last week. International markets, especially Europe, are more vulnerable to economic and geopolitical fallout from Russia’s invasion of Ukraine. The Bloomberg U.S. Aggregate Bond Index again shed slightly, with losses concentrated in the corporate bond market. The ongoing conflict in Ukraine will likely capture most of the attention this week, along with Friday’s update of the U.S. employment situation.

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A Powerful Lesson in How Markets Work

On the day Russia invaded Ukraine, U.S. stocks started out sharply lower as the breadth of the invasion was on the high side of expectations. Then, by mid-day, the S&P 500 turned sharply higher and rallied, and on Friday the S&P 500 jumped again. For those unfamiliar with how markets work, it might seem like the market was responding positively to an unprovoked act of aggression that will cost many lives.

That isn’t the case. Instead, markets are functioning much as they should. Markets look forward and gauge the probability of events. In this case, the decline the previous week and the first two days of last week reflected market expectations that an invasion would take place. Once an invasion was reflected in market prices, the market moved on to additional factors.

The additional factors can be broken into three groups:

  • Adverse economic consequences of sanctions
  • Risks of escalation
  • Long-term consequences

The initial decline on Thursday reflected the impression that the attack’s objective is to take over the whole country. Some believed Putin would only focus on the eastern part of Ukraine, which has a higher percentage of Russian speakers. But a more aggressive attack suggested more severe sanctions were likely.

Instead, Europe and the U.S. introduced tough sanctions that will challenge the Russians, but importantly exclude existing energy imports from Russia. That means Russia is likely to continue to export oil and natural gas to Europe. When it comes to market impact, how the conflict affects Western Europe is the top concern. Developed nations in Western Europe make up 17.2% of the MSCI ACWI. Countries that border Ukraine are only 0.6% of the same index, and that data includes Russia and was calculated prior to the Russian stock market’s decline this year.

The second factor is the likelihood of the conflict escalating beyond Ukraine. There is news some European countries may provide planes to Ukraine to support its air force. Sanctions tightened over the weekend, targeting the Russian central bank and some Russian banks’ access to the Swift global payment system that facilitates cross-border transfers. In response, Putin announced he had placed Russia’s nuclear forces on higher alert. The longer the conflict lasts the more likely the market will experience big swings from changing expectations on the risk of escalation. A small increase in the odds of a dangerous outcome could push markets lower.

The region’s long-term stability, which is our third factor, would be enhanced by a more stable Russia that is less likely to be aggressive to its neighbors. It also is promoted by a more united NATO willing to confront any ongoing Russian threat. Germany’s announcement that it would increase military spending above 2% of GDP implies a greater commitment to military deterrence.

The unprovoked attack on Ukraine is a human tragedy, but its portfolio impact is much smaller because Ukraine doesn’t play a key role in the global economy. The biggest challenge is sizing up how this affects Europe’s recovery and how likely the conflict is to escalate beyond Ukraine. The sanctions announced over the weekend may be helpful in pressuring Russia. They may also raise the risks Russia will escalate the conflict in response to European nations providing more aid.

Trying to guess how markets will react to challenges can be very difficult. Predicting what will happen isn’t enough. It requires understanding existing market expectations, predicting how other players will react to events, and sorting out how other investors may respond. A more productive approach is to stay focused on your long-term plan and recognize that bearing risk is often the source of long-term returns.

War is Pushing Prices Higher

Ukraine and Russia are leading providers of key agriculture and energy products. As a result, the war is likely to create shortages of some resources. When demand for a resource is high and the supply is low, prices tend to increase.

In this case, prices of grain, oil and gas, and marine shipping are moving higher because Russia and Ukraine are:

Europe’s breadbasket

Russia and Ukraine grow a lot of wheat and other grains. For the 2021-22 crop year, S&P Global Platts reported that Russia was expected to export 36.5 million metric tons (mm tons) of wheat, while Ukraine was expected to export:

  • 22.5 mm tons of wheat,
  • 33.5 mm tons of corn, and
  • 6.6 mm tons of sunflower oil.

For comparison, the United States is forecast to export about 22 mm tons of wheat in the same period.

Wheat and grain prices have increased sharply since the conflict began, but inflation isn’t the only concern. “The disruption of grain exports from Ukraine and Russia through the Black Sea will probably lead to physical shortages of food in the world, particularly for countries dependent on those supplies, such as Egypt, Tunisia, Morocco, Pakistan and Indonesia,” reported John Dizard of FT.

Critical to Europe’s energy security

Oil prices have been on the rise for more than a year, in part because of supply and demand issues related to the pandemic. Last week, the price of oil rose even higher as investors, “digested the news that the world’s second biggest oil exporter [Russia] had gone to war with a country at the center of a web of energy export infrastructure [Ukraine],” reported Derek Brower and colleagues at FT.

Russia also is the world’s top exporter of natural gas. It supplies about one-third of Europe’s natural gas, which is piped from Siberian fields through Ukraine’s gas transport system to the Eurozone. Some Russian oil also travels through Ukraine to Europe, reported Áine Quinn and Elena Mazneva in Fortune. A disruption in oil and gas supplies could lead to shortages in Europe and push energy prices higher.

Important shipping ports

The Black Sea and the Sea of Azov are home to ports where grain, chemicals, steel and other exports are loaded and shipped to other parts of the world. In the early days of the war, three non-military cargo ships were damaged by Russian air strikes or missiles. As a result, the London marine insurance market changed the risk status of the Russian and Ukrainian waters in the Black Sea and the Sea of Azov, designating them as high-risk regions. The change will increase the costs of shipping and could push global inflation higher.

The war is likely to affect governments, economies and financial markets in additional ways.

IRS Issues Identity Theft Warning

The IRS is reminding taxpayers to be vigilant and watch out for IRS impersonation scams intended to trick them into providing their personal and financial information. Some of the schemes included text message, e-mail, and phone scams. The IRS also warns people to be aware of potential unemployment fraud.

Text Message Scams

If you receive an unsolicited text message claiming to be from the IRS or a program linked to the IRS, take a screenshot of the message and email it to with the below information:

  • Date/time/time zone the text message was received.
  • Phone number that received the text message.
  • Do not click on links or attachments from suspicious or unexpected messages.

E-mail Phishing Scams

Please be aware that the IRS does not contact taxpayers by email to request personal or financial information. Most of the time, the IRS will contact taxpayers through regular mail delivered by the United States Postal Service. Similar to a potential text message scam, report the email to by sending the suspicious email as an attachment.

Phone Scams

The IRS (and its authorized private collection agencies) will never:

  • Call requesting immediate payment using prepaid debit cards, gift cards, or wire transfer.
  • Threaten to arrest a taxpayer by bringing in law-enforcement or local police.
  • Demand taxes be paid without the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone

Unemployment Fraud

Organized crime rings have started using stolen identities to claim unemployment or other benefits for which the taxpayer never applied. Victims of unemployment identity theft may receive:

  • Mail from a government agency about an unemployment claim or payment they did not file.
  • An IRS Form 1099-G reflecting benefits that were not expected or received. The form itself may also be from a state for which the taxpayer did not file for benefits.

For information on necessary steps to take for suspected unemployment fraud, taxpayers can visit the U.S. Department of Labor’s fraud page here.

The IRS focuses on tax-related identity theft and suggested taxpayers take the below steps if they feel their Social Security number has been compromised:

  • Respond immediately to any IRS notice and call the number provided.
  • Complete IRS Form 14039 (Identity Theft affidavit).
  • Continue to pay their taxes and file their tax return, even if it must be done by paper.
  • For specialized assistance, call 1-800-908-4490.

If you have any questions about this information, please contact us.

Did you Know? This Week in History

February 28, 1953: Chemical Structure of DNA Discovered

On February 28, 1953, Cambridge University scientists James D. Watson and Francis H.C. Crick announced that they discovered the double-helix structure of DNA, the molecule containing human genes.

Though DNA, short for deoxyribonucleic acid, was discovered in 1869, its crucial role in determining genetic inheritance wasn’t demonstrated until 1943. In the early 1950s, Watson and Crick were only two of many scientists working on figuring out the structure of DNA. California chemist Linus Pauling suggested an incorrect model at the beginning of 1953, prompting Watson and Crick to try and beat Pauling at his own game.

Watson and Crick’s discovery was formally announced on April 25, 1953, following its publication in that month’s issue of Nature magazine. The article revolutionized the study of biology and medicine. Among the developments that followed directly from it were pre-natal screening for disease genes; genetically engineered foods; the ability to identify human remains; the rational design of treatments for diseases such as AIDS; and the accurate testing of physical evidence in order to convict or exonerate criminals.

A larger controversy arose over the use Watson and Crick made of work done by another DNA researcher, Rosalind Franklin. Colleague Maurice Wilkins showed Watson and Crick Franklin's X-ray photographic work to Watson just before he and Crick made their famous discovery. The imagery established that the DNA molecule existed in a helical conformation. When Crick and Watson won the Nobel Prize in 1962, they shared it with Wilkins. Franklin, who died in 1958 of ovarian cancer and was thus ineligible for the award, never learned of the role her photos played in the historic scientific breakthrough.

Weekly Focus

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