Stocks Mixed in Wild Week Driven by Ukraine Conflict
Wow, what a week, shortened by the markets being closed on Monday. The markets were down on Tuesday, and then tanked on Wednesday, as Russia invaded Ukraine. Then Thursday, we had the largest one-day reversal since 2008, as the markets emerged from the morning abyss, only to finish the day with a strong gain. Then on Friday, the markets rocketed the highest amount since November 2020. After all that volatility, the Dow (-0.0%) exhibited a fractional loss, while the NASDAQ (+1.1%) and S&P 500 (+0.8%) finished the week with a gain. Taxable bonds fell about 0.5%, while tax-free municipal bonds ended their 2-week losing streak by gaining about 0.2%. Bonds are caught in a tug-of-war as they gain when there is market fear (Ukraine conflict), but fall when there is concerns of inflation. Those are the two major headlines driving the bond markets right now.
As for the stock market, let’s start with the fundamentals. Positive economic data was pouring in early in the week, as the global economies have been reacting favorably to the Omicron virus fading away and economies re-opening. Of course, that news is completely masked by the Russia-Ukraine conflict that began last Wednesday. We can expect extreme volatility resulting from that conflict, which could range from positive news associated with a cease fire agreement, to negative news such as the potential use of nuclear weapons or an attack on a NATO country. Thus, we can expect the markets to remain incredibly unpredictable while this conflict remains on the forefront of the headlines.
So why did the markets react so favorably on Thursday and Friday in the face of the conflict? Well, it can be based on two reasons, the second of which annoys me. For starters, many investors felt as if the markets were oversold, lending to a good buying opportunity. Secondly, markets are responding to investors’ belief that the Fed may raise interest rates by only 0.25% in March, instead of the previously expected 0.5%. It’s like threatening the baby that you’re going to take away two candies, but the baby is happy when you later say you may take away only one. That annoys me. Regardless, we made moves to our clients’ portfolios late last week to reduce risk in the face of the geopolitical uncertainty.
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