At the time of this writing, Russia has started an invasion of Ukraine. Not discounting the loss of life and our desire for hostilities to cease, from an economic and investing point of view, we do not believe the current situation will lead to a recession or have long-lasting effects on the U.S. economy.
We do expect near-term volatility as market participants assess the implications of the actions of everyone involved. However, in the long term, we are more concerned with the actions of the Federal Reserve, the increase of the money supply, and the resulting inflationary pressures that we have seen in recent years. To give some historical context, below is a chart prepared by JP Morgan that shows the duration and impact of geopolitical events between 1973 and 2014.
Looking ahead, it is possible that money will come to the U.S. from abroad as investors of all kinds seek a safer environment. We had also expected the rise in rates from the Federal Reserve to be an impetus for money to flow to U.S. fixed income markets as investors sought higher yields relative to their home countries. Energy markets are responding with higher prices, as well, as the world assesses the impact of the Russian action on the availability of oil and gas. An increase in energy prices could prove beneficial to U.S. energy corporations, especially if the regulatory environment changes to make domestic production of energy easier.
However, the greatest risk for recession lies with the Federal Reserve. We do agree that the Fed needs to take action to address the over-supply of money and the resulting inflationary environment. It is possible the Fed will eventually over-tighten, and that is the real risk. As the situation develops, the Fed may use current market volatility as a rationale for inaction. Everything is subject to change, and so we continue to keep our eyes on the macro issues.
Market volatility is usually not fun and we recognize that can be disconcerting. If you have concerns, we do encourage you to reach out to your relationship manager and have a discussion. We are here to help you navigate the issues of the financial markets, and we appreciate the trust you have placed in us.
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