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Ukraine and Inflation Fight the Market

It’s a perfect storm. As we write to you, inflation worries and uncertainty surrounding a Russian-to-Ukraine invasion are heavily weighing on the market.
These two issues are part of concerning feedback loop; investors tend to bid up the…

It’s a perfect storm. As we write to you, inflation worries and uncertainty surrounding a Russian-to-Ukraine invasion are heavily weighing on the market.

These two issues are part of concerning feedback loop; investors tend to bid up the price of energy when geopolitical risks like the Ukraine situation emerge.


Yesterday, we uploaded a bonus video to our Learning Markets YouTube channel to discuss these very issues. You can check it out here.


Now, this whole situation has kept oil prices very elevated.

Right now, it appears that rhetoric from the Kremlin about recognizing “separatist regions” in Eastern Ukraine, will keep uncertainty building and energy prices rising.


Currently, West Texas Intermediate oil is priced over $90 per barrel. On an inflation-adjusted basis, this is higher than the average price the last time energy spiked (2014). While this isn’t a market killer yet, high energy prices are an important component of inflationary pressure.

We have recommended long energy positions several times over the last two months in this column, and those trades have done very well. But the bottom line is that if oil prices continue to rise it will start to drag on the economy.


The recent data flow — such as last week’s Producer Price Index (PPI) — has only made traders more nervous about inflation. Manufacturers and other producers are paying more for their materials thanks to inflation, so they charge consumers like you more.


However, there are a couple of announcements later this week that could give us some relief if they show pricing pressure is starting to ease:

  • On Thursday, the Bureau of Economic Analysis will release preliminary GDP results for the fourth quarter of 2021. Now, we know this doesn’t sound like a market-moving event because the data is so old, but it has a big impact on sentiment.

After growing by 4-6% in the first two quarters last year, GDP growth dropped back to its normal range of 2.1% in the third quarter. We don’t think it’s a coincident that “normal” GDP numbers flattened some of the enthusiasm for stocks after that report. More importantly, GDP comes with an inflation number called the “deflator.”

We don’t think the deflator will surprise anyone, but it might show some easing in pricing pressure and that could make a big difference for traders.

  • Additionally, on Friday the Personal Consumption Expenditure (PCE) numbers come out. This inflation report doesn’t usually get the kind of press that CPI does, but you should care about it a lot because the Federal Reserve cares about it.

Right now, traders think PCE will come in about where it did last month (about 6% annualized inflation), which wouldn’t be great for the market. If it comes in higher, we may have to adjust our outlook a little more negatively. However, there continue to be signs that supply chain issues are easing enough to help with inflation so there is a real possibility of a surprise.

If PCE is lower than expected, we think investors will jump back into inflation-sensitive sectors — like technology and retail — with both feet. On our watchlist are the cash-flow leaders in those sectors like Microsoft (NASDAQ:MSFT), NVIDIA (NASDAQ:NVDA), Costco Wholesale (NASDAQ:COST), and Target (NYSE:TGT) following the report.

We know this update got in the weeds a little with all the economic talk, but it’s important to have some perspective right now. Keep in mind that “panic talk” about inflation and rising interest rates gets lots of views and clicks, but it may not reflect what happens in real life.


Yes, we are concerned about rising inflation, which will increase interest rates, but we don’t think you should start stockpiling gold bullion yet and preparing for the end of the world.

Keep in mind that even during the inflationary period of 1976-1983 (including the early 80s recession) the S&P 500 still gained nearly 90%. If the other economic fundamentals are good (earnings, hiring, wages, etc.), then we should keep a positive outlook.


By the end of this week, we will know a lot more about the situation in Ukraine and inflation that can help us make a better estimate for when this round of volatility will end, and we can be buyers again.

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