11 March, 2022 Financial Planning Investment Services Portfolio Management Wealth Management

Weekly Update - Renewed Volatility as Markets React to Crisis

Weekly_Market_Update

The ongoing military and humanitarian crisis in Ukraine has caused continued volatility in global equity markets. Stock prices shifted up and down this week as commodity prices spiked, inflation rose, and investors responded to differing news updates regarding attacks on Ukrainian cities and attempted negotiations with Russia.  

 

Major markets were mixed with the S&P 500 and NASDAQ moving lower this week, and European markets making some recovery after lows hit earlier this month. Closer to home, the S&P/TSX has been resilient, holding just below record highs achieved in November. Canada’s stock market has a higher composition of energy and commodity names, many of which have been less affected, and have even seen prices move higher due to the turmoil in Ukraine. 

 

Western nations have levied an unprecedented range of sanctions on Russian business interests. The U.S. placed a ban on the import of Russian oil and gas this week, and a group of 300+ multinational corporations announced they have ceased operations in Russia. The Russian government’s foreign reserves have already been frozen, limiting its ability to support the Ruble in currency markets, and the Ruble has fallen by approximately 50% since the Russian invasion.

 

The Russian economy is thought to be in crisis over the swift imposition of sanctions, leading to a jump in already high inflation, product shortages, and the closure of the Russian stock market. At this point, however, Russia’s exports of energy to Europe remain a significant source of revenues.

 

Concerns about drastic cuts in supply are causing commodities prices including energy, food, and metals to spike. Monthly price increases in some cases are staggering: Crude Oil +24%, Wheat +40%, Coal +55%, Natural Gas (Europe) +80%, Nickel +100%, Lithium + 260%. Rising input costs will lead to higher wholesale and retail prices, putting further pressure on inflation which rose to a fresh 40-year high of 7.9% in the U.S. in February. Continued supply chain issues, trade sanctions, a robust labour market, and a reopening service economy are likely to stoke inflation further in the coming months.

 

Consumer sentiment, already impacted by higher prices, reduced real incomes, and rising interest rates is certain to take another hit based on the current geopolitical crisis. U.S. consumer sentiment for March has reached its lowest level in the past 10 years. 

 

Bond yields continue to be volatile, moving higher on expectations that central banks will raise rates, and lower as investors seek safe shelter. The U.S. 10-year Treasury is up significantly year over year, hovering near 2.0%.  Gold prices have also moved higher, seen as a secure safe haven.  Interest rate sensitive tech stocks have moved up and down with shifting sentiment but have moved lower year to date under the pressure of higher rates.

   

The U.S. Federal Reserve and The Bank of England are both expected to announce an increase in policy rates mid next week. The current conditions make central bank responses exceptionally tricky. Increased interest rates are needed to control inflation but will also dampen economic growth. Inflation and slower growth introduce the spectre of potential ‘stagflation’ – an stagnant growth/inflation outcome which could hurt equity markets moving forward.

 

However, many important economic indicators have been trending positively, painting a paradoxical ‘glass half full’ picture. In several key respects the economy is doing well. Canada added 337,000 jobs in February, bringing the unemployment rate down to 5.5%. The trend in GDP growth has been good.  Consumer savings are up and developed country economies are moving to remove pandemic restrictions.

 

Regardless of near-term challenges, investors will benefit by remaining focused on longer term goals. Political crises and disasters in years past have eventually come to resolution, with equity markets rewarding patient investors. Investment portfolio returns are less volatile over longer holding periods.

 

  • Short-Term View: Russia’s invasion of Ukraine has caused significant uncertainty, increased market volatility, and pushed up commodity prices.
  • Longer-Term Thinking: Markets are cyclical over shorter periods and react negatively to uncertainty and geopolitical crisis. However, growth in equities over time is in alignment with long-term historical trends. Maintaining a balanced and diversified portfolio is key to your long-term investment success.
  • Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes.

Our Experts Say...

 

“Looking at the income component, the inflationary safeguard is the ability for real estate rents to reset higher upon renewal of an existing lease or releasing of vacant space. In the current environment where higher inflation is linked to stronger economic growth, rents benefit from – and thus hedge – future inflation.”

 

Corrado Russo CFA, MBA

Head of Global Public -

Real Estate Investments

Hazelview Investments

Global Real Estate Specialist

 

 

Over the past 10 years, markets are positive. Perspective is key. Markets do react to short-term increases in volatility – see the grey lines below – but the long-term trend is upward in the blue and red lines.

 

Source: Morningstar Direct. Growth of $100,000 shown. Total returns from Mar. 11, 2012 to Mar. 10, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.