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Stocks continue to decline as Russia-Ukraine war intensifies

 The stock market is a battlefield. Always remember to survive in the game first. Only those that survive the battle can enjoy the spoils of the war. – Benjamin Lee

The Dow Jones Industrial Average fell for the fourth consecutive week and the technology-laden Nasdaq Composite Index plunged nearly 3% as Russian forces escalated their assault on the country of Ukraine. The uncertainty surrounding the war was solely responsible for the sell-off in stocks as there is not enough clarity on the outcome to stabilize the stock market. Wars are considered risk-off events as many investors moved into safe havens such as bonds and cash as stock market volatility is expected to continue. Russia seized a Ukraine nuclear plant and Russian President Vladimir Putin put his nuclear forces on high alert as the invasion was met by stiff resistance from Ukrainian forces. The U.S. and its European allies countered by taking action against Russia’s central banks, effectively freezing the country’s foreign reserves, and implemented additional sanctions intended to cripple Russia’s economy. Federal Reserve Chairman Jerome Powell also testified before Congress last week and said that a quarter point interest rate hike will likely occur this month despite the highly uncertain impact of the war in Ukraine on the U. S. economy. He acknowledged that the labor market is extremely tight and that inflation is running well above the Fed’s 2% target, but said that the Russia-Ukraine war has created much uncertainty and could cause the Fed to proceed very carefully in its attempt to normalize monetary policy. With West Texas Intermediate crude oil surging above $110 a barrel and other commodity prices increasing, inflation fears are growing in the U.S. and Europe. Federal Reserve monetary policies are still very accommodative and the economy remains strong as the February employment report released on Friday showed that 678,000 new jobs were created and that the unemployment rate fell to 3.8% from 3.9%. The number of jobs was much better that expected and wages barely rose during the month while the labor participation rate increased, another positive sign.  Oil price spikes can lead to a recession, but with relatively easy monetary policies and a strong economy, such an outcome is not the most likely scenario. The stock market could be in the process now of putting in a bottom and history suggests that investors should continue to stay the course.

Last Week

The other employment data last week was also favorable as ADP reported that private companies added 475,000 jobs in February, better than the 400,000 that was expected, while weekly jobless claims fell by 18,000 to 215,000, below the estimate of 225,000 and the lowest total since January 1st. Both the ISM manufacturing and services sector indices in February were above 55, comfortably above the 50 threshold that indicates expansion, and construction spending in January was well above expectations.

Major integrated oil companies such as BP, Shell and Exxon Mobil pulled out of their joint ventures with Russia and the U.S. was seriously considering sanctioning Russian oil and not importing it.

For the week, the Dow Jones Industrial Average dropped 1.3% to close at 33,614 while the S&P 500 Index declined 1.3% to close at 4,328. The Nasdaq Composite Index fell 2.8% to close at 13,313.

This Week

The consumer price index (CPI) for February is expected to show a nearly 8% increase year-over-year while the core CPI that excludes food and energy prices is expected to increase over 6%. Both reports would represent the highest levels of inflation in 40 years and there doesn’t appear to be any relief soon as commodity prices remain high. The preliminary University of Michigan consumer sentiment index in March is forecast to be slightly higher than in February.

The most prominent companies that are scheduled to report quarterly earnings this week are Dick’s Sporting Goods, Campbell Soup, CrowdStrike Holdings, Oracle, DocuSign, Ciena, Rivian Automotive and Ulta Beauty.

Portfolio Strategy

The primary focus for the markets again this week will be Russia’s invasion of Ukraine and what effect it will have on the price of oil and other commodities. Last week for the first time since 2008, the price of a barrel of West Texas Intermediate crude oil rose over 25% and topped $115. But oil is not the only commodity that is experiencing sharp gains as natural gas, wheat, palladium and aluminum are also soaring in price. Russia is one of the world’s largest exporters of all of these commodities and the invasion has only sparked fears of even higher inflation. The consumer price index (CPI) for February will be released on Thursday and the headline reading that includes food and energy prices could be a shocker and exceed 8% year-over-year. With inflation running hot, pandemic restrictions being lifted, the job numbers soaring and the economy growing at a moderate pace, one would have expected intermediate and longer-term bond yields to rise, especially with the Federal Reserve poised to begin raising interest rates when it meets next week. However, the opposite has happened as investors have sought the safety of Treasuries and other government bonds as the war between Russia and Ukraine intensifies. Fears that the spike in oil prices might lead to a global economic slowdown and possibly a recession have also caused a drop in yields and a flattening of the yield curve. The yield on the 10-year Treasury has declined to 1.77% while the 2-year Treasury yield has fallen to 1.54%, a difference of only 23 basis points. (A basis point is one hundredth of one percent). When the yield curve becomes inverted and the 2-year Treasury yield is higher than the 10-year Treasury yield, more often than not a recession ensues. While this scenario is not the most likely outcome given the current strength and resiliency of the U.S. economy, the longer the war in Ukraine drags on, the greater is the likelihood that a recession may occur.