The theme of 2022 so far? Market uncertainty and volatility.
Geopolitics dominated headlines in February as Russia - Ukraine tensions escalated. Similar to January, stocks experienced a rebound to end the month in a classic case of “buy the rumor, sell the news” (just in reverse, as markets were trending lower but bounced higher on news that Russia had officially invaded Ukraine). However, major US indices still closed the month in neg-ative territory with losses of 4.64% for the Nasdaq 100, 3.14% for the S&P 500, and 3.56% for the Dow.
With inflation already running hot, oil prices have spiked to their highest levels since 2014 amid the war (Russia is the world’s second largest oil and gas exporter). This brings even more atten-tion to the already highly anticipated Fed meeting concluding on March 16. While a rate hike is broadly expected at this point to begin the process of cooling inflation, investors will be looking for hints regarding future policy decisions, and if current geopolitical matters could have any im-pact on those decisions.
International stocks also closed lower for the month, in line with their US counterparts. However, losses remained somewhat muted considering the closer proximity to geopolitical tensions, with losses of 2.65% for developed countries and 3.72% for emerging markets. Only a couple months into the year, international stocks have held up slightly better than US stocks, a shift in the past 10+ year trend (to be determined if it sticks or not this time).
Bonds were again able to provide more stability throughout the month, but still closed 1.12% low-er as the 10-year Treasury yield rose from 1.79% to 1.83%. Rising yields have been pressuring bond prices as of late, though a “bad month” in bond markets is still just equivalent to a “bad day” in stocks.
While markets have looked somewhat bleak so far in 2022, it’s important to keep the recent volatility in perspective. Zooming out over a longer timeframe shows a much different story than the past couple of months (for example, most major indices are still relatively positive over the past couple of years as a whole). Having a plan and investment strategy in place can help pro-vide direction during uncertain markets, helping guide you in the long-run.
With Russia having invaded Ukraine, it has many investors wondering what comes next.
The US and other Western countries have slapped significant sanctions on Russia to inflict eco-nomic and financial harm, but how does all of this impact markets?
While every situation has its own unique set of circumstances (nobody knows exactly how things will play out until after the fact), it can be useful to use history to look at previous periods of geo-political conflict.
Going back to World War II, there have been multiple “market shock” events (9/11 Terrorist At-tacks, Cuban Missile Crisis, Kennedy Assassination, Gulf War, etc).
Surprisingly, markets have held up relatively well on average during these periods of time with higher geopolitical risks.
The initial reaction for markets during geopolitical events tends to skew negative. However, the drawdowns are typically short lived and shallow in nature in the grand scheme of things.
The average data highlights this point:
- First Day Loss: -1.2%
- Total Loss: -5%
- Recovery Time: 47 days
Even in times of just war specifically, markets tend to be volatile immediately, but even back out over a couple of months.
So why is this the case?
The stock market can be heartless and counterintuitive at times.
It doesn’t seem like there are many great outcomes in the short-term right now, but as history has shown there will eventually be a light at the end of the tunnel.
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The Market Health Indicator (MHI) measures market health on a scale of 0 - 100, analyzing various market segments such as economics, technicals, and volatility. Higher scores indicate healthier market conditions.
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