MANHATTAN (CN) — Pushing aside inflation, the major issue for Wall Street is now the Russia-Ukraine crisis, which caused markets to plummet on Thursday and saw U.S. indices pull down a second losing week.
By Friday’s closing bell, the Dow Jones Industrial Average had declined 659 points for the week, while the S&P 500 and Nasdaq lost 70 points and 243 points, respectively. Increased militarism on the Ukraine border hasn’t helped crude oil prices, either, which have continued to increase and topped out at just over $91 a barrel.
Wall Street typically prices in problems weeks and perhaps even months ahead, but geopolitical concerns that have tangible effects on markets are one thing most analysts fear, since it deals with the unknown.
“At this point, the Russia-Ukraine standoff has been a significant risk on market participants’ radar for about three months,” Jonas Goltermann, senior markets economist at Capital Economics, wrote in a Friday investors’ note. “But until recently, the impact on financial markets has been felt mainly in Russian and Ukrainian assets … and in commodity markets, where the fear that a conflict would lead to significant disruptions to the supply of energy.”
The rise in bond yields and fall in equity markets were attributed only just a few days ago, Goltermann wrote, to the hawkish Federal Reserve, given the expectation that it will raise interest rates as much as by 50 basis points next month. How far they could fall and how quickly they could rebound remains uncertain as the risk of further escalation between Russia and Ukraine will keep risky assets under pressure.
Markets plummeted on Thursday after Secretary of State Anthony Blinken told the United Nations that Russia was persisting in “taking steps down the path to war,” with the Dow shedding more than 600 points, mostly in the last hour of trading.
After the sell-off, Peter Essele, head of portfolio management for Commonwealth Financial Network, noted the lingering supply-chain problems and the Fed’s new hawkish approach.
“Investors, wary of any bad news, have been unable to maintain positive momentum in equity markets across the globe as geopolitical risks dominate headlines,” he said. “A perfect storm may be on the horizon if calmer heads don’t prevail.”
While investors wanted to glean some additional insight into the Fed’s approach to interest rates, minutes from its January meeting offered only a few crumbs.
“The Fed has said many times that they have the tools to combat inflation — and they do — but unfortunately those tools have proven to cause recessions, and occasionally double-dip recessions, when they’ve been used in the past,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, predicts the central bank will raise its federal funds interest rate by 1.75% in 2022 when all is said and done, and that it likely starts to shed the bonds on its balance sheet starting in May rather than the later estimate of July.
According to the minutes, members of the Federal Open Markets Committee observed that, “in light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate.” The minutes also noted, however, that “market conditions” would dictate how fast the Fed cleaned out its balance sheet and that it should be done in a “predictable manner.”
“With the bond market pricing in such a steep policy rate path, our prior concern that an aggressive rate of tightening would trigger an unwanted and possibly disorderly tightening in broader financial conditions has been assuaged,” she wrote. “Although, the minutes underscored that Fed officials will be quite attuned to any undue tightening in financial conditions with asset valuations elevated.”
One bright spot that shined through all the dark inflationary clouds was retail sales, which showed a huge rebound last month after a relatively weak December. According to the U.S. Census Bureau, retail sales increased 3.8% in January, following the 2.5% drop the prior month, to hit nearly $650 billion, the strongest monthly gain since March 2021.
Online sales and department stores drove most of the gains, increasing by 14.5% and 9.2%, respectively, though compared with a year ago restaurants and bars, as well as clothing stores, are the clear winners: gaining 27% and 22% over that time period.