- Volatile Markets. The new year has open with a more jittery tone, and declines. Following two years of largely synchronized accommodative monetary policies, central banks from the developed world are beginning to implement tailored tightening to prioritize the taming of inflation. Volatility is on the rise, as climbing interest rates and a high level of geopolitical uncertainty is trumping solid economic and corporate earnings data.
- Russo-Ukrainian Conflict. Tensions have escalated in Eastern Europe, as Russia appears poised to invade Ukraine. Diplomatic efforts have so far failed to stop the buildup of Russian troops on the Ukrainian border, complicating the near-term market outlook. Negotiations between Russia, the US, and other European powers continue, without any apparent progress toward a formal agreement.
- Natural Gas. Russia’s status as a major supplier of natural gas and oil to Europe means that the already tight global energy supply is at risk of further disruption. As much as 40% of the continent’s natural gas is supplied by Russia. No country buys more natural gas from Russia than Germany, Europe’s largest economy. A key ally of the US and a historically important participant in negotiations about Ukraine, the German public and business have little appetite for sanctions on Russia. The economic reliance is mutual, too, with two-thirds of Russia’s export revenues coming from energy.
- Inflation. Inflation remains persistently high. The latest Consumer Price Index (CPI) had increased 7.5% over the year through January, hitting a 40-year high. The unusual restart dynamics of extraordinary demand meeting supply bottlenecks and wage pressures continue to push prices higher. Gas prices, among others, have been soaring. Though a notoriously imperfect inflation indicator, prices at the pump remain perhaps the single greatest influence on consumers attitudes toward inflation, causing a hit to confidence.
- Central Bank. With demand holding steady and inflation hot, Fed chair Powell has said the economy no longer needed sustained accommodative support. The central bank outlined plans for interest rate hikes, and a reduction in the asset holdings on their balance sheet at their last meeting. The tightening approach will likely be measured, especially in the face of geopolitical uncertainty, and be guided by economic data and the shifting outlook.
- Corporate Earnings. The S&P 500 index is reporting earnings growth of more than 29% for Q4, marking the fourth straight quarter of earnings growth above 25%. Margins remain surprisingly solid, despite higher costs. Most companies acknowledged supply chain issues will likely persist in 2022, but a handful are saying they are seeing some improvements.
- Market Outlook. Historically speaking, while devastating from a humanitarian standpoint, geopolitical shocks tend to have a fleeting market impact. The Russia-Ukraine conflict remains very fluid, and political and military tensions continued to rise. We believe a large-scale invasion of Ukraine is possible. Rising geopolitical risks, alongside the coming Fed transition, could lead to continued volatility in the markets in the short-term, but we think strong corporate earnings and healthy consumers should remain supportive of risk assets in 2022.
