All the major US averages have moved to either correction (-10%) or bear market (-20%) levels. There are several reasons for this:

  • Russia / Ukraine – this geopolitical event is causing significant issues especially for Europe. Russia and Ukraine both are large suppliers of energy, metals, and food. The disruptions (from both the conflict and sanctions) will impact the real economy. There is also always the risk of major miscalculation that draws other countries into the conflict. This is going to be an ongoing issue for months but its relevance for financial markets will likely diminish rapidly.
  • Inflation – there is no sign that inflation is cooling and the Russia/Ukraine issue will only increase price pressures that the economy feels from rising commodity prices. The Fed in the past few weeks has made it clear that inflation is the top priority even if it means slowing the economy.
  • Interest rates – the path is clear, rates are going higher with the Fed likely hiking at every meeting through the summer. They may continue this pace for the rest of the year as well but that will depend on the inflation readings that are coming out in August & September. The 2-year yield is currently 1.5%, up from 0.5% at the end of November. The 30-year mortgage rate is up over 1% to 4%. The markets are already doing some of the Fed’s work via higher market-based rates. This will start to cool parts of the economy.
  • Equity markets – while I am writing this, the Nasdaq has turned positive. This is a good sign that the markets don’t believe the Russian/Ukraine situation is likely to spiral out of control. The sell-off in parts of the market (small cap, quality growth stocks, Europe) has been significant and may have created some opportunities.

The equity markets are going to remain volatile but we are due for a major rally soon.

February 24, 2022 | Andrew Mies, CFA® | 6 Meridian