Takeaways

Question:  Can you provide an overview and update on the economy that includes the Russian-Ukraine war as well as inflation and other economic concerns? 

Answer:  It’s an understatement to say that the situation in Ukraine remains extremely fluid after the Russian invasion on February 24, 2022. We’ll be watching for world response and messaging from Washington DC. President Biden delivered his first State of the Union address (SOTU) and Federal Reserve Chairman Powell also spoke during the first week of March. The key takeaways and areas of focus are as follows: 

• The Fed maintains a flexible approach, 
• Inflation poses a downside risk to the economy, 
• Economic sanction fallout could pressure Russian leader Putin,
• State of the United States’ Economy.

The Ukraine-Russia conflict was included in Fed Chairman Powell’s analysis and obvious in his comments. Powell indicated that the 50-basis point rate hike discussed for March is seemingly off the table for the time being. Powell did acknowledge that the Fed must intervene with inflation at 40-year highs and admitted that the Ukraine/Russia situation is “highly uncertain” and is pushing oil prices to their highest level in a decade. Clearly, the geopolitical crisis may cause the Fed to be more patient with rate hikes.

Inflation was a focal point during Biden’s SOTU address. It’s no secret that constituents are very concerned about inflation and see the economy as getting worse despite increased capital expenditures and inventory rebuilding. Rising oil prices and other areas of inflation including wheat prices at their highest level in 14 years. These increased costs outpace any wage gains. The good news is that some supply chain disruptions are starting to reverse and may help to ease certain inflationary pressures.

US and NATO countries continue to ramp up sanctions against Russia including their removal from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the global provider of secure financial transactions and freezing strategic assets. Oil and gasoline prices are at multi-year highs as Russia is the third largest global oil producer. Additional opposition is imposed by political leaders from Sweden, Switzerland, Germany and even Hungary, who have moved away from their traditional neutral stance. Sweden is sending weapons to a country in armed conflict for the first time since 1939 (when the Soviet Union invaded Finland).

Countries around the world are coordinating efforts on state levels and taking corporate actions to inflict severe financial harm to Russia’s economy. Mastercard and Visa suspended operations in Russia, Nike and Apple are no longer selling products to Russia, Meta (formerly Facebook) and Google have blocked ad revenue, major British and US oil companies have divested from partnerships with Russian energy conglomerates, Airbnb is even offering housing to refugees. 

While this may not immediately stop Putin from pursuing his agenda, it may steer him toward a more diplomatic route.

It can be difficult to focus on the strength of the US economy amidst these significant distractions. Global COVID-19 cases have continued to decline since peaking in January. With case levels steadily dropping, the global economy should get a lift and bring relief to supply chain bottlenecks. The biggest downside risk to the economy is surging oil prices that are an enormous burden for consumers. A prolonged conflict between Russia and Ukraine could delay and dampen US growth. As we’ve seen, the stock market fell into correction territory (a decline of more than 10%) for the first time in almost two years.

Corporate earnings were strong from a historical standpoint in the fourth quarter of 2021. The expectation is for our economy to see a shift in spending on goods to services and experiences for the remainder of this year. The market pullback brought the S&P 500 price-to-earnings ratio (PE) down to its lowest level in two years while earnings have remained relatively strong during the equity market pullback. In any given year, the market has experienced some sort of pull-back, with an average annual decline of ~14%, and four 5% or greater pullbacks per year. However, 80% of the time since 1981 the market has closed in positive territory. 

Volatility will likely remain elevated over the next twelve months. Geopolitical tensions, midterm elections, Fed monetary policy, any additional COVID waves and inflation all add to uncertainty. Having a financial plan in place may help in riding through unpredictable times. Stay focused and plan accordingly.

The opinions expressed are those of the writer as of March 7, 2022, but not necessarily those of Raymond James and Associates, and subject to change at any time. All investments are subject to risk, including loss. Diversification does not ensure a profit or protect against a loss in declining market. This material is provided for educational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. Material is provided for informational purposes. Consult your tax professional and financial advisor before making any investment decisions. Holding investments for the long term does not ensure a profitable outcome. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities

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