The unprovoked Russian invasion of Ukraine is creating turmoil and uncertainty for the people of Ukraine and their loved ones around the world. As expected, the situation is also contributing to increased volatility for global markets. However, historically markets have recovered relatively quickly from geopolitical events like this. Looking at major geopolitical events from World War II on, the median time from selloff to recovery was 16 days.
Even with the geopolitical turmoil, inflation remains a major concern for the global economy and for the markets. The U.S. Consumer Price Index (CPI) rose 7.9% for the 12 months that ended this February – a 40-year high. How should we understand this inflation and how might stocks perform in this environment?
I’d begin by observing that the current inflation is a global phenomenon. While there are certainly some inflationary pressures specific to the U.S., accommodative monetary policy, the Ukraine conflict and supply chain issues are driving increased inflation throughout most of the world.
Producer prices have been rising faster than consumer prices in the U.S., as in many countries. Rising input costs can put pressure on companies’ margins unless they’re able to pass along price increases to consumers, so I would not be surprised to see CPI remain around this level or even move modestly higher in the next couple months.
Given the level of inflation, the Federal Reserve (Fed) is expected to begin raising short-term interest rates in March and to hike rates a number of times in 2022.
Since 1990, stocks have tended to dip for a few months after a rate increase, but rally significantly thereafter. As long as the economy remains robust, we would look past any short-term volatility and consider adding modestly to stocks in the event of a rate-driven market decline.
Author David Royal is Chief Investment Officer and Asset Management Executive at Thrivent.