Financial Market Breakdown – Week of February 28, 2022


Quick Highlights

  • Futures are sharply lower as markets react to additional sanctions against Russia, including removing select Russian banks from the SWIFT system. The additional sanctions and historic isolation of Russia by the global community are increasing economic uncertainty.
  • On a positive note, Ukraine and Russia are having peace talks today and, hopefully, that will lead to a ceasefire soon.
  • There were no notable economic reports overnight.
  • Econ Today: No reports today.

What’s Happening in the Financial Market?

Volatility remained elevated with geopolitical tensions running high last week, but the prospects that the Russia–Ukraine conflict would be short-lived, along with mostly encouraging economic data helped stocks turn positive into the end of the week. The S&P 500 gained 0.82% on the week and is now down 8.00% YTD.
From a geopolitical standpoint, the weekend was a positive one as Ukraine continues to provide much stiffer than expected resistance to Russian forces and peace talks started today which, hopefully, will lead to a cease-fire in the near future.
Additionally, the global response and isolation of Russia increased and is now at unprecedented levels, including removing some Russian banks from SWIFT, the closing of international airspace to Russian planes, sports boycotts, and more.
This “cutting off” of Russia from the global banking system, global financial system, and, broadly, global society, has had material impacts in Russia as the ruble crashed another 30% overnight, while the Russian central bank doubled interest rates to 20% to try and halt widely reported bank runs in the country.
While necessary, these unprecedented sanctions raise the risk of financial contagion. Russia is a big economy that is totally interconnected to the global financial system and cutting them off does risk ripples hitting the European banking system and other global markets. And, considering Friday’s big rally, that’s why futures are down this morning: increased contagion risk.
So far though, there are no material signs of contagion and it appears the situation is making some progress toward a cease-fire, so we don’t see a return of last week’s lows.
While Ukraine will remain in the news, the longer-term issue for markets has been, and still is, the Fed. Two key Fed-related questions will determine how long this bull market lives on: 1) How quickly will the Fed hike rates? 2) How dramatically will the Fed reduce its balance sheet? Barring a major setback of progress regarding Russia–Ukraine that increases the chances of a Russia vs. NATO conflict, the bottom line is that the Fed is the major issue for stocks going forward.
Positively, we will learn a lot more about this Fed over the next two weeks via Powell’s testimony this week, the rate hike decision on March 16 (25 bps or 50 bps), “dots” that show how many hikes we can expect this year (four or five?), and further clarity on balance sheet reduction (how quickly and are there asset sales?).

Bottom Line

It’s the Fed tightening that will eventually end the rally and the economic expansion, not the Russia–Ukraine conflict. Any color on how long it will take for the Fed to do that is key and that’s why the next few weeks are critical for all investors.
Given the still-uncertain environment, we continue to favor value over growth to insulate from increased random market volatility and cyclical sector exposure via energy, commodities, fixed income, and cash. These are strategies that have worked so far in 2022 and we think they can continue to work going forward.

Near-Term General U.S. Stock Market Outlook

Near-Term (1 month) Stock Market Outlook: Neutral
Stocks dropped again last week following the further deterioration in the Russia–Ukraine situation. Understanding future Fed policy and what that means for economic growth will remain the major focus of markets as we progress through the year, and we should continue to expect elevated volatility.

By The Numbers



Bane O'Leary