The new trading day faces uncertainty, but futures markets suggest additional gains. A Russian invasion of Ukraine is now under way, threatening the stability of the global energy, financial, and economic markets. The West, led by the United States, is implementing financial and economic sanctions against Russia and key individuals in an effort to contain the conflict. Allied troop counts are building in Eastern Europe in defense of NATO (North Atlantic Treaty Organization) countries. The major domestic stock market indexes have posted low-single-digit declines so far this week. We note that the Standard & Poor’s 500 Index has joined the NASDAQ Exchange, falling into correction territory (a 10% or more decline from a recent high); the Dow Jones Industrial Average is close to suffering a similar setback, as well. Share-price volatility has perked up and will probably stay elevated in the coming days.
This morning, the Commerce Department released consumer spending data for January, showing renewed strength in the wake of softness reported in the final month of 2021. The personal-consumption expenditures price index for the month - an inflation measure that the Federal Reserve is closely monitoring - remained at a high level. It’s fairly certain that the central bank will raise short-term interest rates at its upcoming mid-March meeting. Economists generally expect the Fed to increase rates at a measured pace, likely in one-quarter-point increments. Also seeming likely are reductions to the Fed’s balance sheet, once the new rate cycle has begun. The domestic economy is healthy, but corporate earnings growth will probably ease from the very strong year-over-year increases recorded in 2021, which followed a coronavirus-challenged performance in 2020. Barring any additional significant waves of the coronavirus, especially of the deadly Delta variety, the economy should progress on a track toward normality this year and into 2023. At this time, considering the heightened political and economic uncertainty, investors would do well to maintain broad diversity within their individual stock portfolios, with a meaningful weighting of conservative, dividend-paying issues.
Yesterday afternoon, President Joe Biden’s speech, regarding sanctions aimed at Russia, provided some clarity, and stocks gained. Sentiment on Wall Street that the Fed will now proceed at a measured pace on rates also lent support to the market. Indeed, stock indexes achieved a stunning late rally, ending the day in positive territory. Most visibly, technology, communications services, consumer discretionary, and real estate stocks posted solid gains. Consumer staples, financials, energy, and materials stocks suffered declines. These moves bucked the trends of recent weeks, favoring conservative stocks over growth issues. Among the best performers Thursday were vaccine-maker Moderna (MRNA), up 15%; concert promoter Live Nation Entertainment (LYV), rising nearly 10%; and streaming service provider Netflix (NFLX), gaining 6%. Despite yesterday’s reversal, we advise caution. The Russia/Ukraine situation is far from over and could cause further wide swings in share prices over the near term. Also, it’s probably best to wait and see just how aggressive the Fed actually is in the new rate cycle.
– David M. Reimer
At the time of this article’ writing, the author did not have positions in any of the companies mentioned.
