Markets Fall on Inflation and Ukraine Worries

The Dow (-1.0%), NASDAQ (-2.2%), and S&P 500 (-1.8%) all dropped last week after showing signs of recovery from a torrid month of January.  Meanwhile, taxable bonds fell about 0.5% and tax-free municipal bonds fell sharply, over 1%.

The headlines last week were driven by the Russia-Ukraine conflict, which has begun to overshadow the discussions surrounding inflation and the Fed raising interest rates.  So, let’s talk about the conflict then.  In our professional opinion, this is mostly headline risk because a minor skirmish halfway across the globe should not have too much of an impact on corporate profits, which are the foundation of stock prices.  However, this conflict could cause a sharp rise in oil prices if the US and Europe place restrictions on the purchase of oil from Russia.  That would put added pressure on inflation, which has a more direct impact on US corporate profits.

Then there becomes the huge downside risk, even if very low.  What if this conflict escalates and becomes a full-fledged war in Eastern Europe?  This could quickly become the largest conflict since World War II.  God forbid this escalates into the use of nuclear weapons, which frankly, could put an end to civilization as we know it, so the stock markets would become mostly irrelevant.  Many are also concerned that this conflict could serve as a proxy for China to invade Taiwan, and then we have conflicts on both sides of the world with the other two world powers.  This isn’t out of the question, and fear tends to have a larger impact on short term swings in the stock markets.  Our only recommendation is to try and stay away from the emotional reactions.  These shall (hopefully soon) pass.

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