Dow falls for 5th straight week as war in Ukraine drags on

To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them. – Thomas Phelps

It was another losing week for stocks as the Dow Jones Industrial Average entered into correction territory, defined as a decline of more than 10% from its all-time high, while the Nasdaq Composite Index dropped into a bear market, defined as a loss of more than 20% from its record high. The Dow has now fallen for the fifth consecutive week while the Nasdaq and the S&P 500 Index have declined for two straight weeks as the war in Ukraine shows no signs of ending anytime soon. Talks between Russia and Ukraine saw no progress last week as Russian forces continued their advance on Ukraine’s capital city. The market is being driven solely by events in Ukraine as economic fundamentals and corporate earnings have taken a back seat. Stagflation has now become a real fear as investors are looking at slower economic growth and more persistent inflation. The price of West Texas Intermediate crude oil touched $130 a barrel last week before finally settling at $109 a barrel on Friday as the U.S. banned Russian oil and natural gas imports. Much of the blame for the increase in the price of oil, however, can be placed on the Biden administration and its domestic energy policies. Instead of relying on its own vast energy resources, the U.S. lobbied Venezuela and Saudi Arabia last week to increase their output to meet our needs and reduce oil prices. The U.S. also announced that Russia will no longer be granted preferred trade status and major companies such as JP Morgan Chase, Goldman Sachs, McDonald’s, Visa and Mastercard announced that they were winding down operations in Russia and shuttering their business. The spike in inflation was reflected in the February consumer price index (CPI) last week as it rose 7.9% from a year ago, the highest level since January 1982. The report was really no surprise as gasoline, food and shelter were the biggest contributors to the huge increase in the CPI number. In response to the surge in inflation, the yield on the 10-year Treasury rose to 2.0%. With the prospect of high oil and commodity prices in the foreseeable future, the outlook for the economy and the stock market remain uncertain, but fears are growing that they may lead to a serious economic slowdown or even a recession.

Last Week

The Job Openings and Labor Turnover Survey (JOLTS) report in January showed that job openings totaled 11.3 million, nearly 5 million above the total number of people counted as unemployed. With the jobless rate at 3.8%, many economists feel the economy is near full employment. Weekly jobless claims were 227,000, an increase of 11,000 from the previous week and higher than the estimate of 216,000. The University of Michigan consumer sentiment index fell in March from its reading in February and was at the lowest level since September 2011 as high inflation has taken a toll on consumers.

For the week, the Dow Jones Industrial Average dropped 2.0% to close at 32,944 while the S&P 500 Index fell 2.9% to close at 4,204. The Nasdaq Composite Index plunged 3.5% to close at 12,843.

This Week

The producer price index (PPI) for February is expected to jump 10% year-over-year, the biggest increase ever since the annual data was first calculated in 2010. Retail sales in February are forecast to increase modestly after posting a big increase in January while leading economic indicators are also expected to show a modest increase. Housing starts and existing home sales for February are expected to approximate last month’s totals and remain healthy despite higher mortgage rates and supply shortages.

The Federal Open Market Committee (FOMC) meets this week and is expected to raise the federal funds interest rate by a quarter of a percentage point to 0.25% -0.5%, the first increase in the rate since December 2018 and what is likely to be the first in a series of rate hikes aimed at reducing inflation and normalizing monetary policy. The Bank of Japan (BOJ) also announces its monetary policy decision and is expected to leave its benchmark interest rate unchanged at negative 0.1%.

The most notable companies that are scheduled to report quarterly earnings this week are Land’s End, Dollar General, GameStop, Lennar, FedEx and Accenture.

Portfolio Strategy

Normally, the Federal Reserve Open Market Committee (FOMC) meeting is the most anticipated and significant event when it occurs, but this week the primary focus will again be on the war in Ukraine, which has roiled oil markets and caused commodity prices to soar. During his testimony before Congress, Federal Reserve Chairman Jerome Powell basically telegraphed his intention to raise interest rates by 25 basis points (a basis point is one hundredth of one percent) at the March meeting and that is the expectation this week. There should be little reaction from the markets to this increase as inflation has been red hot and is expected to remain high over the near term. What the markets will be focused on, however, is what revisions the Fed has made in its forecast for interest rates, inflation and the economy. While the Fed must tighten monetary policy in order to combat soaring inflation, it also must consider the ongoing crisis in Ukraine and the increased risk that surging oil prices could slow the economy. With this in mind, the Fed will leave open the possibility that it will limit the number of interest rate hikes this year and next depending on inflation and economic data. The Fed might also decide that it must postpone reducing its $9 trillion balance sheet if it would have negative effects on the economy. Needless to say, the Fed is in a tough spot and will need to thread the needle in whatever policy moves it makes. But one thing is certain: the impact of Russian sanctions on commodities markets and the uncertainty of the outcome of the Ukraine-Russia conflict will undoubtedly continue to keep markets volatile.