There are a lot of questions floating around about our current market. One of them being around the impact of a potential Russian invasion of Ukraine. What impact could that have on an already volatile market? While any individual event could have different consequences for the market, it is worth noting that stocks have historically taken geopolitical events in strides. The chart shown in the video for this episode of the largest geopolitical events dating all the way back to World War II, shows that stocks fully recovered losses on average of 47 days after an average draw down of 5%. No guarantees, but previous experience has indicated that a possible conflict between Russia and Ukraine will unlikely have a material impact on our economy domestically, in corporate profits. There is one area that we would have to look at, which would be the potential for higher oil prices and any impact that would have on longer term spending.
We’ve seen a lot of volatility in the market this year due to the unknowns. One of those unknowns is trying to figure out what the Fed is going to do. As we highlighted last week, the Fed had their meeting but were still very ambiguous on what they wanted to do. They do want to continue tapering, which is the slowing pace of bond purchases. As that concludes, we’re looking at a near certainty of a rate hike in March. What we don’t know, however, is how big of a rate hike it will be. We also don’t know after the initial rate hike in March, how frequent they are going to increase rates. Will it be an every meeting thing or will it be every other meeting? How many rate hikes are we going to see this year? After the rate hikes start, they do want to start reducing their balance sheet and that means that they want to stop reinvesting in bonds that they already own. They don’t want to do both at the same time and cause too much friction. We will be on the lookout for this to see when that starts. The Fed must be nimble with a lot of choppy data that’s out there. Between goods and services, inflation, and GDP, there’s a lot of mixed reviews out there to keep an eye on.
Goods vs. Services
The Fed mentioned that they are going to likely be data dependent, which, can sometimes be frustratingly unhelpful. However, if you can identify the data they’re looking at, you can start to see what they may be doing in the near future. Throughout the crisis, we focused on the jobs data because we felt like the Fed was definitely watching that. Now, the unemployment rate has gotten to a point where the Fed feels comfortable with jobs so now what are they looking at? A lot of people have been talking about inflation and that’s something we’ve been looking at closely here for the last few months. Two charts that we have constantly referred to is the goods versus services spending chart. Good spending is more inflationary than services spending. If you buy a good, it typically must be built and shipped to a store to be bought. There’s a lot more that goes into the buying of goods. During the COVID crisis, we saw a huge spike in relative good spending versus service spending. You can see on the chart shown in the video for this episode, where the good spending really has been well above trend for over a year now. However, we’re starting to see it fall closer to the trend line. That likely will be a positive thing in terms of bringing inflation down. If we can see the consumer led market start to solve inflation without the Fed having to be overly aggressive, the Fed may back off some of their more aggressive tone. This goods versus services spending is very important and something to watch. As goods come down, we need to see services go up. We don’t need to see services and goods drop because that’s very indicative of a recession and that’s not what we want. Instead, it needs to be a natural order of goods and services.
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