The most candid comment we can make on the current crisis is that we do not know exactly how it will unfold. It certainly appears that Russia’s intention is to take control of Ukraine by force. This is a geopolitical crisis of the first order and a grave humanitarian crisis. Without minimizing either of those, it may not be an economic crisis on the same order of magnitude as the first wave of the COVID pandemic—when we lacked a vaccine and economies were shutting down across the globe. The global economy survived the pandemic crisis and returned growth, albeit with massive fiscal and monetary stimulus. In retrospect, that crisis proved to be a good time to take on risk assets, such as stocks.
US economic growth was showing distinct signs of slowing down relative to last year’s rapid pace before this morning’s news. Both the US and the global economies were still on a growth trajectory prior to these events, only at a slower pace. Nothing about war helps the growth story, and the uncertainty it brings could cause hesitation on the part of some businesses to invest or expand. The biggest economic drag from these events may be their impact on inflation, specifically the cost of commodities. Russia is a major exporter of energy, and energy is a major input to almost everything we consume.
The near-term impact on Treasury rates will be down, as investors pile into “safe” investments. Bonds carrying any type of credit risk may move in the opposite direction. This news will probably cause the Federal Reserve to proceed with greater caution with respect to any rate hikes, but it would be premature to assume that a March rate increase is off the table. The Fed faces a tough dilemma; it wants to use rate increases to combat inflation, which may be exacerbated by war, but it does not want to alarm in a crisis environment. Furthermore, the movement towards safer investments will tend to counter any effort to raise rates, at least in the middle of the yield curve.
I see no immediate impact on the US employment situation – the labor force remains very tight. It would take a very significant economic slowdown to reverse recent gains on the unemployment front.
Investors should anticipate that heightened volatility in stocks and other risk assets shall continue, gold and other safe havens will rise, the dollar should rise, and oil will remain high for a while. Apart from inflation, the fundamentals of most American businesses are not meaningfully altered by these events, so far. Obviously, this is a situation that can evolve significantly over the next several weeks.
Hold the people of Ukraine in your hearts. Our forebears paid a heavy price to ensure that the sovereignty of nations might vest their people. Modern history has produced a number of bullies who would concentrate that power in their own hands, by force. In the end, they have all failed… at great cost.
As always, if we can help with any particular concerns or questions, do not hesitate to reach out to us
Written by Philip Rich
, Chief Investment Officer