Russia invasion of Ukraine
The long-awaited invasion of Ukraine officially started yesterday. President Putin is determined to overtake Ukraine, so he has access to their Oil reserves and Black Sea shipping channels. In anticipation of this, and other economic factors, our markets are down about 10% for the year. Certainly, this is a big deal for the Ukrainian people, but from a global economic perspective, as one economist put it, Russia is a small Gas Station to the world. They are however a key supplier of natural gas to Europe. Other than Oil, Russia doesn’t consume or produce much else from the global economy.
Our markets hate uncertainty and wars surely provide a lot of that. The markets rebounded from a large mid-day loss yesterday and our markets went up significantly again today. It’s too early to call it a market capitulation, as we would expect our markets continue to be volatile until the military effort has subsided.
As a reminder, our markets experience a 10% correction historically about every 18 months. We agree market losses never feel good, even if they are “historically normal”.
Here are other potential impacts of the conflict:
Interest rate increases promised by the federal bank last year, which were supposed to be implemented in the next couple months may be on hold or slowed. The federal bank announced yesterday they may reconsider rate increases depending on impacts to consumer spending due to the conflict. We still expect the first rate hike to be in March.
Consumer spending – corporate earnings continue to be strong. The baby boomer is retiring earlier than expected and continues to spend money. Second homes, cars, home remodels, … All of which are throwing the supply chain upside down. We think there will be a short term pull back on consumer spending, but the duration of the Russian effort should be short, and the American consumer will go back to consuming shortly afterwards.
Oil Prices have risen dramatically over the past 6 months, in part due to anticipation of Russian aggression, and in part because of the OPEC+ being opportunistic and reducing oil supplies. The economic sanctions from the US and Europe will inhibit Russia’s “Gas Station” volume, so oil prices will probably continue to be higher in the short term. A deal on Iran’s nuclear situation could alleviate short term oil supply issues, as Iran can immediately add to the oil supply and offset Russia’s production.
Inflation will probably continue to be higher as long as Oil Prices remain high.
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Eric & Kelly