Another 'F' falls Another 'F' falls\images\insights\article\oil-shipment-tanker-small.jpg December 7 2022 February 25 2022

Another 'F' falls

Foreign crisis joins two other "Fs" affecting markets: fiscal policy and Fed.

Published February 25 2022

Regular readers of our market memos know that one of the risks that we’ve cited for equities is the potential for our soft response on Afghanistan provoking action elsewhere, including Ukraine. Well, we got that this week, and then some.  A broad-based Russian invasion beyond Ukraine’s eastern border areas already has the country’s capital of Kyiv reportedly in Russian sights. Seeing and imagining the suffering of the Ukrainian people is leaving many of us simply speechless; this kind of naked, unprovoked aggression of one country against another is in some ways unprecedented since World War II. On the other hand, this was precisely one of the scenarios we and others were concerned about after the Afghanistan debacle. 

It’s too soon to say with certainty how this plays out. In the very near term, implications for markets are more uncertainty and volatility as tail risks get discussed and reassessed. In the intermediate term, it seems likely that we are left with a permanent Russian occupation of Ukraine and a Western response that ratchets ever higher the sanctions against Russia. For now, markets are cheered that Russia’s energy exports have been exempted but we guess over time they won’t be. That means more pressure on the Fed to accelerate its hiking cycle, something we’ve been expecting in any case. 

Although the risk of a policy mistake or further geopolitical disruption beyond Ukraine is now higher, we are still of the view that our base case for more stable markets and a resumption of growth later in the year remains the highest probability outcome. If anything, the dampening impact on demand of the increased pressure on energy prices may help the Fed achieve the soft landing we’ve been projecting and lead markets towards our optimistic year-end outlook of 5,300 on the S&P 500. But volatility should remain higher in the near term, and the hourly drumbeat of the latest news flow out of the Ukraine is likely to only exacerbate that. 

Our advice to clients remains to wait for better levels to reinvest the cash we raised in our balanced portfolio models last September and again in January. Markets still need to digest a more hawkish Fed, and pressure on interest rates and therefore growth stock valuations should remain high. Value portfolios, holding stocks with lower valuations, more defensive businesses and inflation beneficiaries should continue to outperform, along with the entire energy complex.

Tags Equity .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Diversification and asset allocation do not assure a profit nor protect against loss.

Growth stocks are typically more volatile than value stocks.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

Federated Global Investment Management Corp.