Lexicon Financial Group Weekly Update

Tuesday, February 28, 2022


Looking Back

The tensions that were mounting in Eastern Europe finally spilled over into real armed conflict last week. The large-scale invasion of the Ukraine by Russia impacted global markets and led to oil prices breaking the $100 per barrel level– the first time since 2014. Russia is the world’s No. 2 oil producer and a major supplier of natural gas. Disruptions of supply of oil and gas could drive retail prices higher and make it more expensive for people around the world to fuel their cars and heat their homes. Gasoline prices are already at record levels in parts of Europe and the United States. (1) Western countries quickly responded with aggressive economic sanctions.

On Thursday markets in North America fell at the outset but finished the day significantly above the morning lows. Moscow’s MOEX stock index plunged by as much as 45% before recovering slightly to close down 33%. The additional sanctions imposed by the U.S. wiped out almost $200 billion in stock-market value and the ruble sank to a record low. The cost of insuring Russian debt against default soared to the highest since 2009, and the Bank of Russia intervened in the foreign exchange market for the first time in years to take measures to tame volatility. (2)

Source: Data provided by Factset showing the price return of all the above indices for February24th, 2022, in its respective local currency

By Friday, all the markets had made positive gains even the Russian markets. On the same day, Russian forces entered the northern suburbs of Kyiv. Russia is paying a high economic and political cost for its invasion but it remains to be seen if this deters it from what it is doing to the Ukraine. Sanctions need time to work. Meanwhile, on the home front Russian citizens and lawmakers opposed to the invasion are getting more vocal, trying to change the system from within.

 

Looking Around

Generally, markets abhor uncertainty and during times of geopolitical unrest uncertainty is high. This means that markets are expected to be increasingly volatile over the next few months. However, despite short-term volatility, long-term investors may gain some reassurance that in the face of global conflict, stock markets do tend to recover. The question is… how long does it take.

For our clients with short-term time horizons – those that need to spend money today – it might be a useful conversation to review with us the impact that market volatility might have on their overall financial plan.

According to MarketWatch columnist Mark Hubert, data compiled by Ned Davis Research examining the 28 worst political or economic crises over the six decades before the 9/11 attacks in 2001. (3)

The short-term impact is certainly visible. In the wake of the invasion, Brent crude futures topped $100. To put this in perspective, the price of crude would need to pass $120, adjusted for inflation, to reach 2014 levels. The prices of agricultural commodities like corn and wheat have risen significantly as Russian and the Ukraine account for 20% of global corn exports and 25% of wheat exports. (4) Economically, this may place the North American agriculture sector in position to perform well in the months ahead.

 

Looking Beyond

Global oil supplies were tight before the invasion and potentially will be even tighter now unless the Organization of the Petroleum Exporting Countries (OPEC) decides to increase its output. Despite this oil closed below $92 on Friday. Natural gas prices jumped by double-digit percentages in Europe last week. Gold, wheat and corn prices also rose last week. All of this adds to fuel to inflation for consumers and businesses which could lead to an economic slowdown. This will impact how central banks increase interest rates this year.

For investors, the current market volatility may trigger emotional responses that may make them want to get out of the market. Historically, this has been the wrong reaction particularly for long-term investors. Over time, markets overcame numerous setbacks and times of volatility. Every market decline is painful but as you can see from the chart below, stocks overcome bumps in the road. Timing the market is beyond difficult and there are benefits to staying invested.

Remember:

  • The stock market is cyclical.
  • Generally, returns have been less volatile over longer holding periods.
  • Returns over time have been positive in most cases.
  • Even a few strong market days can significantly impact total returns.
  • Dollar-cost averaging can help take advantage of volatility.
  • In the long run, the upturns have always been stronger than the downturns. (5)

 

Growth of $10,000 in the S&P500

Source: Morningstar. This chart is for illustrative purposes only.

 

Further Reading

Markets & Investing – Raymond James

Stocks rise after Ukraine panic, oil back below $100

The list of global sanctions on Russia for the war in Ukraine

 

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.

 

  1. Global oil prices soar above $100 and could go much higher, Matt Egan and Charles Riley, CNN Business, February 24, 2022
  2. Russian stocks crash 33% and ruble plunges to record low, Mark Thompson and Chris Liakos, CNN Business, February 24, 2022
  3. What a Russian invasion of Ukraine would mean for markets as Biden warns Putin of ‘severe costs’, William Watts, MarketWatch, February 14, 2022
  4. How Could the Russia-Ukraine Conflict Affect Your Investments?, Dan Burrows, Kiplinger, February 24, 2022
  5. Over time, markets have proved positive and resilient, Raymond James, Markets and Investing

 

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