As the Russian invasion of Ukraine plunged the global markets into a frenzy, we must discuss how international conflicts impact the U.S. stock market.
On the surface, it would appear that global conflict would harm stock prices. After all, who wants to invest in a company whose another country might target products or services in retaliation for military action? However, this is not always the case. There have been several instances where global conflict has positively impacted stock prices.
For example, the Gulf War in 1991 caused the Dow Jones Industrial Average to rise by more than 20%. And the Israeli-Lebanon conflict in 2006 had a similar effect, with the Dow Jones rising by more than 4%. If you look at the following charts, you can see the movement of the S&P 500 Index moved through the Persian Gulf War, as well as other recent conflicts – especially the Crimean Crisis in 2014. The market may dip at the beginning and middle of a conflict, but historically prices have recovered well.
So why do stock prices typically rebound after global conflicts? The most likely explanation is that investors feel more confident in the global economy once the conflict is over and are willing to invest in companies that had previously been avoided.
It’s important to note that this conflict may be different from an economic perspective. When the United States goes to war, it often signals to the Federal Reserve that it is time to implement inflation safeguards such as interest rate caps, issuing bonds to fund defense spending, or other price control measures. However, in the current market where rates are very low, and inflation is nearing all-time highs, many of the traditional economic tools may not be sufficient.
All Eyes are On the Fed
The U.S. Federal Reserve is expected to raise interest rates by a quarter percent at its next meeting, scheduled for March 15th.
This would be the first interest rate hike since the 2017-2018 cycle, and its Chair Jerome Powell’s primary focus is to curb inflation. At 6%, our current inflation level is triple the Fed’s 2% goal which is why the Fed is making a concerted effort to raise rates. While there is some risk that an interest rate hike could cause a market correction, most investors believe that the Fed will proceed cautiously and only raise rates by a quarter percent at a time.
Some analysts predict that the stock market will react negatively to the news, while others believe it has already been priced into the market. Powell said he supported a half-percent raise if the economy takes well to the initial hike.
What does this mean for investors?
Simply put, it means that investors should be prepared for a bit of volatility in the coming weeks. However, long-term investors should not be too concerned, as the Fed will proceed cautiously with its rate hikes.
Government Sanctions – The Double-Edged Economic Sword
As we have seen in recent weeks, the U.S. government has been using sanctions as a way to put pressure on Russia. So far, these sanctions have had a mixed bag of results.
On the one hand, they have caused the Russian Ruble to plummet and have led to a rise in food prices. However, they have also had the effect of causing Russian bond yields to spike, as investors become more reluctant to invest in Russian debt. So far, it’s unclear whether or not these sanctions will successfully get Russia to back down. However, they are having a significant impact on the Russian economy.
Government sanctions are a way for the U.S. government to put pressure on other countries. They typically involve placing restrictions on trade or investment with the target country. One of the main reasons the U.S. government uses sanctions is that they are a relatively cheap way to apply pressure. Unlike military action, sanctions do not involve any high financial cost to the United States.
However, sanctions can also be a double-edged sword. While they may be effective in causing pain to the target country, they can also have negative consequences for the United States. For example, when the U.S. placed sanctions on Iran in 2012, it led to a significant increase in food prices in the United States. And when the U.S. placed sanctions on Russia in 2014, it led to a rise in Russian bond yields.
2021 Was Intense For Homebuilder’s, but 2022 May Lead to More Balanced Materials Prices
The real estate market is constantly in flux, and 2021 saw a sharp increase in home prices. One of the most important variables for home prices is supply and demand of building materials: when there’s more demand for homes than there are homes available, prices go up, and when there’s more supply than demand, prices go down.
Home prices and materials prices are tightly related. But, their relation depends on the overall demand for homes in a given market. When there is more demand than the supply of homes, home prices rise because builders will have to charge more money for their products. However, this increases the cost of these materials even further so that when people buy them, they can make a profit.
On the other hand, builders will have to charge less money for their products when there is more supply than demand for homes. And since the cost of materials has already decreased, this results in a decrease in the home’s overall price.
According to Cumming, “Construction material prices [increased] 18.4% in 2021, the largest increase since its data collection began in 1995.” and that “Many of the price increases were driven by increasing construction activity while supply had yet to recover. This mismatch between supply and demand pushed prices higher and was further exacerbated by other issues such as logistics problems and ongoing global COVID-19 outbreaks.”
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For the Month Ending 2/28/2022 (Cumulative Returns)1
Did You Know?
Did you ever wonder how months got their names? It’s a question that has puzzled many people over the years. January, February, March… where did these names come from? Today, we’re going to take a brief look at the history of how months got their names.
The Roman calendar was the first major system to organize months into a specific order, and many of our current calendar’s months refer to the Roman structure. January, February, and March are the first three months of the year in our calendar, and their names likely come from Latin words that referred to activities that took place during these months. January is named after janua (the door), which was the month when new crops were planted. February refers to februa which was a ceremony for purification rite, which took place during month. Finally, March is named after Mars the god of war.
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.