News and Commentary

February 2022 Market Update

As we entered 2022, several factors captured the market’s attention, including higher-than-average equity valuations, rising interest rates, supply chain issues and the degree to which they influence the higher-than-normal-inflationary readings. One issue that we did not expect to escalate as quickly as it has is the current situation between Russia and Ukraine.

How this Started and Where We Are Today?

In 1994, three years after the Ukrainian parliament declared independence from the Soviet Union, it agreed to trade its stockpile of nuclear weapons in exchange for guarantees that the United States, the United Kingdom and Russia would respect its independence, sovereignty and its existing borders. While Ukraine also wanted to join its European counterparts to become a member of the North Atlantic Treaty Organization (NATO), Russian opposition and influence has prevented this from occurring.
Over the most recent weeks, Russia has positioned its troops and military arsenal around Ukraine, and, on February 23, began a military assault that Western leaders forewarned. While Russia has stated that the goal of this military aggression is to “demilitarize” Ukraine, some believe the country is seeking to rebuild its sphere of influence over former Soviet states, including Ukraine, Belarus and Georgia. In efforts to prevent war, various nations are employing diplomatic measures, levying sanctions on the Russian state.

How Does the Russian Invasion of Ukraine Impact U.S. Equity Markets?

From an historical perspective, the U.S. equity markets tend to look past geopolitical events, experiencing minimal market declines with an average total drawdown of less than 5 percent. Swift recoveries generally follow within an average of 43 days. But, as many would expect, the more severe the event, the greater the impact on the market. For example, after the 9/11 terrorist attacks on the U.S., the S&P 500 took 11 days to reach a bottom 11.6 percent decline and a total of 31 days to fully recover to prior market highs. As the chart below demonstrates, the bombing of Pearl Harbor was one of the worst events in terms of market declines, with the S&P 500 falling a total of 19.8 percent over a 143-day period and taking 307 days to fully recover.
Unlike geopolitical events, stock market corrections, like the one we have experienced since the S&P 500’s peaks in the beginning of January 2021, are very common. These events, in which markets decline more than 10 percent, have occurred about once every 18 months, on average dating back to 1928.
One of the economic factors at the forefront of the current situation is the fact that Russia produces a significant amount of oil and natural gas relied on by European countries. Germany’s announcement that it will not certify the Nord Stream 2 Pipeline that carries natural gas from Russia to Germany is expected to interrupt commodity supplies and has already caused recent spikes in prices.
On the home front, markets are grappling with the prospect of the Fed raising interest rates as early as March and elevated inflation that has been rising to levels not seen since the 1980s. It is likely U.S. markets will continue to experience short-term volatility until we gain clarity on the Federal Reserve’s rate hike cycle and the impact it could have on easing inflation. Furthermore, the markets are waiting to see whether the Russia-Ukraine situation will have a diplomatic solution or be dragged out into further tensions.
While impossible to predict future outcomes, we continue to remain optimistic about the remainder of this year, due in part to strong corporate earnings, historically low levels of unemployment, strong consumer balance sheets and spending habits, and the beginning of reductions in supply chain bottlenecks. We will continue to monitor these events closely and keep you updated as further actions are warranted.
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