Investors have understandably been transfixed by the unfolding invasion of Ukraine by Russia and the humanitarian crisis it has created. While not seeking in any way to downplay or diminish the tragic developments in Eastern Europe, we would note last week saw several positive points of news on the US economy, including continuing unemployment claims hitting a 52-year low, Q4 GDP growth being revised higher to 7%, and housing prices up 19% year-on-year in December.
That said, our focus this week is on Russia / Ukraine and while no one knows how the conflict will develop and what its long-term geopolitical impact will prove to be, we have a few thoughts we wanted to share. The first would be overt Russian military action likely starts and stops with Ukraine as other countries in the region are either under Russian influence or NATO members. A Russian attack on those states would trigger Article 5 of the NATO treaty, compelling the alliance to come to their defense and beginning what could prove to be the deadliest conflict since WW II. The second would be that while geopolitical events can drive market volatility near-term, they historically have had little lasting impact on markets, as investors pivot back to what ultimately drives stock prices, earnings, and interest rates (see graphs). The third is the most likely economic impact of the conflict is additional inflationary pressure, as supply chains are disrupted and commodities are pushed higher in price, something we have seen with oil trading above $90 a barrel.
That said, the US, having become a leading producer of oil, is in a much more advantageous position today than during prior oil price shocks, a dynamic that should mitigate the economic damage from higher petroleum prices. And finally, we see the economic uncertainty and market volatility caused by Russia’s invasion of Ukraine as providing the Federal Reserve with a very credible reason for moving cautiously as it concerns the tightening of monetary policy, a process likely to commence at its March meeting.