The global equity markets are under significant selling pressure this morning, after the news overnight (Eastern Time) that Russia has launched a full-scale invasion of Ukraine, killing dozens of Ukrainian soldiers. This action will likely bring a swift and harsh response from the United States and its North Atlantic Treaty Organization (NATO) allies, and further penalties from the West after the announcement of the first tranche of economic sanctions yesterday. President Biden and the leaders from the G7 countries have called an emergency meeting this morning to discuss retaliatory measures against Russia.
The U.S. equity futures tumbled on the news, and the major averages in Europe, including Germany’s DAX index of stocks and France’s counterpart CAC-40, were down more than 5% earlier today. Today’s selloff will push the NASDAQ Composite into bear market territory, with the technology-heavy index now trading more than 20% below its all-time high established late last year. Some historical indicators raise the possibility of the S&P 500 index extending its decline into bear market (20% down) territory as well. The volatility caused by this significant international crisis may not abate for an extended period.
The turmoil in Ukraine will disrupt global oil supplies. Earlier this week, Germany announced that it would not certify the Nord Stream 2 pipeline that would move natural gas from Russia to Western Europe, if Russia took military actions against Ukraine. The price of crude oil both here and on the Continent jumped above the $100-a-barrel mark today. The forthcoming economic sanctions and embargos also will push the prices of agricultural and metals commodities higher. In particular, aluminum prices are likely to jump, as both oil and gas are used in production of the metal.
It will take a lot to pull the investment community’s attention away from the crisis in Eastern Europe, but there were some economic reports this morning that need mentioning. At 8:30 A.M. (EST), the Department of Labor reported that initial weekly jobless claims for the week ending February 19th declined 16,000, to 232,000, coming in below expectations. At the same time, the Commerce Department released its first revision for the fourth-quarter GDP estimate, with the annualized rate of growth moving just from 6.9% to 7.0%. Within the GDP report, investors should note that the pricing component jumped by 7.1%, the largest increase since 1981. This adds further fuel to the inflation narrative for Wall Street. A half-hour into the trading day at 10:00 a.m. Eastern, we will get the latest figures on new home sales, which will be closely monitored by economists for signs about how this key economic sector is doing.
In recent sessions, there has been a notable movement out of the riskier higher-growth areas and into higher-yielding safe-haven instruments and that is being ratcheted up this morning. Bonds—even with rising inflationary pressures and the likelihood of a more hawkish Federal Reserve in the coming months which will take actions including the ending of the central bank’s monthly bond-buying program—are in high demand for their safety component. The yield on the benchmark 10-year Treasury note, which moves in the opposite direction to the price, has fallen roughly 10 basis points, as investors are in a “flight to safety” mode. Likewise, the price of gold, which is seen as a safe-haven holding and also a hedge against inflation, recently topped the $1,950-an-ounce market as a result of the geopolitical worries.
In the equity market, the higher-yielding utilities stocks and the energy issues, the latter of which are benefiting from the recent surge in oil prices, have been of most interest in this difficult stretch for stocks, and that will likely be the case once again today. Many of the oil stocks are trading notably higher in pre-market action. The stocks of the defense manufacturers also are garnering interest.
The same cannot be said for the consumer discretionary stocks, which have been among the biggest laggards this week. In particular, since the start of 2022, the housing-related stocks and shares of the homebuilders, which were among the biggest winners on Wall Street during the COVID-19 pandemic, have sold off notably. Typically, these issues don’t fare as well when lending rates are on the rise and the Federal Reserve appears wedded to a less accommodative monetary policy course. On point, mortgage applications for the latest week tumbled to their lowest reading since December 2019. This may be a sign that housing affordability is becoming an issue for some prospective homebuyers. Likewise, shares of Home Depot (HD) fell earlier this week on earnings news and lower-than-expected near-term predictions from the home improvement retailer. Conversely, shares of Lowe’s (LOW) traded higher in a generally down market yesterday after reporting strong quarterly results, but the stock, like that of Home Depot, is still down sharply since the start of calendar 2022.
So what is an investor to do these days? Exercising caution and keeping a portion of the portfolio in cash and bonds remains our current recommendation in this highly volatile market. On the equity side, the value-oriented stocks should get a closer look, given the ongoing inflationary pressures and with the Federal Reserve set to raise short-term interest rates. The high-flying growth stocks typically don’t perform as well when interest rates are on the rise. Investors should note that the rotation into value stocks by hedge funds so far in 2022 has been the highest since 2011.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
