The equity futures are presaging a rally at the start of the trading day stateside, prompted by Ukrainian President Volodymyr Zelensky’s overnight announcement that his war-torn country is no longer pressing for North Atlantic Treaty Organization (NATO) membership, which was one of the main reasons cited for Russia’s invasion. The news may provide Russia with a path to pull back from the attack, claim some sort of a victory, and possibly begin talks on a ceasefire as economic damage from the West’s sanctions mount. The price of oil, which has surged in recent weeks due to the turmoil, is pulling back some on these reports. That said, the situation can change on a dime, as we saw during yesterday’s whipsaw performance for stocks.
The major equity averages have been under significant pressure once again this week, which included sharp declines on Monday and heavy selling into yesterday’s closing bell that more than wiped out a 586-point intra-day rally for the Dow Jones Industrial Average. At the conclusion of trading, the Dow 30, NASDAQ Composite, and S&P 500 Index were all in negative territory. With today being light on both economic and earnings news, traders are likely to focus much of their attention on the events that have prompted this heightened volatility and ongoing market correction, which now has the broader S&P 500 Index sitting nearly 14% below its recent all-time high and the technology heavy NASDAQ in bear market territory, down more than 20% from its most recent peak.
Wall Street is facing a “wall of worry” that includes the ongoing war in Ukraine, worldwide inflation concerns (driven, in part, by skyrocketing energy prices), and a sentiment that the Federal Reserve will begin to tighten the monetary reins at next week’s Federal Open Market Committee meeting. These fears were further stoked by an announcement yesterday afternoon that the U.S. will ban Russian imports of oil, which will probably worsen the supply/demand imbalance and drive energy prices even higher. Meanwhile, Federal Reserve leaders will be looking at tomorrow’s report on consumer prices for the latest on inflation, and the consensus amongst economists is that the new pricing data will show little easing of inflationary pressures stateside, prompting the Fed to take action.
The war in Ukraine and the retaliatory economic sanctions against Russia are driving oil prices both here and on the Continent to levels not seen in 14 years. This has unnerved investors, as oil and gas prices are currently at a level that typically precedes a period of slowing economic growth and, in many cases, a recession. Consumers who are faced with high prices at the gas pump (which hit an all-time high this week) and large home heating bills are more likely to defer their purchases of discretionary items, which tends to have a negative ripple effect across the broader economy. Not surprisingly, energy stocks have been in high demand in recent weeks, while many consumer discretionary stocks, especially those that were big winners during the pandemic, are being sold at a feverish pace.
Likewise, the technology sector has not been a good place to be so far in 2022. With all signs pointing to the Federal Reserve raising short-term interest rates at next week’s Federal Open Market Committee (FOMC) meeting, higher-growth technology stocks, especially those of companies with thin operating margins, have felt the pinch as investors retreat to more conservative issues.
There is clearly a “flight to safety” strategy in play among skittish investors. Despite hot pricing data and the Fed’s intention to raise interest rates, yields on fixed-income securities, which move in the opposite direction to the price, have moved lower, still sitting below 2.00% as investors gobble up these historically safer investments. Gold, which also is viewed as a safe-haven instrument and a hedge against inflation, recently topped the $2,000-an-ounce level on worries about the geopolitical turmoil in Eastern Europe. On the equity side, the higher-yielding utilities are garnering some interest in a market where most sectors are out of favor right now.
So what is an investor to do in a market where volatility has spiked? The first thing we recommend is not to panic sell. However, we continue to believe that investors should exercise some extra caution. On the equity front, we would recommend that investors give the stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line a closer look. Those equities as a whole have historically fared better than the broader market during turbulent periods such as the one Wall Street faces now.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
