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Caught in an Economic and Political Crosscurrent: Market Commentary from Cabana’s CEO – February 22, 2022

3 years ago

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Difficult market conditions persist, with the Russia/Ukraine dispute front and center following Russia’s decision to “recognize the independence of” disputed territories in eastern Ukraine. As such, they moved incrementally towards a more significant armed conflict. The U.S. and European allies have responded with sanctions including Germany’s stopping the Nord Stream 2 gas pipeline from Russia. The result of this has been an immediate jump in energy prices and whipsaw in the bond market. On one side, we have the reality that an economic war with Russia will negatively impact world economies. On the other side of it, commodity prices (particularly energy) are likely going to rise putting additional pressure on bond yields. As I see it, bond markets are today trying to figure out if yields should rise in response to inflationary pressures or fall in a flight to “safe” assets. This is an important calculation because it has ramifications on the Federal Reserve’s decision around raising interest rates and tightening monetary supply.  

Behind all the concerning headlines, we see 2021 fourth quarter earnings continue to come in strong. According to FactSet, 84% of companies have reported, with 77% of companies beating estimates. These are relatively good numbers and evidence a bull market lurking behind the scenes. We seem to be caught within an economic and political crosscurrent, making for difficult and volatile investing. We should begin to see some clarity as we digest the impending changes to monetary conditions over the next few weeks. There is also a historical precedent, which supports the idea of “sell the threat and buy the invasion” when it comes to armed conflicts. The stock market tends to rally once the war starts. This is just another counterintuitive aspect of investing that makes for some head scratching. We shall soon see if that tendency comes to pass again. 

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January 17, 2024

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