Market Impact & Implications of Ukraine War – Part II

This post was originally written on February 24, 2022.

After indiscriminate selling at the open of the market this morning, the Nasdaq and then the broader market staged quite a dramatic reversal and closed up 1.5% for the S&P500 and the Tech heavy Nasdaq up 3.5%. What did we learn from today:

1. Market sell off was orderly. We did not see any financial market or banking system dislocations that are typically associated with impending recessions.
2. Markets don’t like it when politicians impose sanctions which could affect market liquidity or pricing. So far we are not seeing much of that despite a barrage of new sanctions being announced by the Biden Administration and the international community. Sanctions that could impact markets are:
3. Limits on Russian exports
4. The US is limiting Russia’s ability to do business in US-Dollar and Yen
5. Russian banks will be sanctioned and cut off from US financial system – excluding energy payments (!)
6. Every Russian asset in America will be frozen
7. US is considering releasing additional barrels from its Strategic Petroleum Reserve (SPR)
   
   Military considerations: 1. NATO is holding a summit tomorrow (Friday) to map out the next steps. 2. US is prepared to respond if Russia initiates cyber attacks on the US (Cyber stocks were up more than 10% today)

What are we seeing inside the market?

        Bond market: High Yield rallied today, a positive. When lower quality bonds diverge from higher quality Treasuries, for example, that is a sign of market stress. We continue to watch that closely. The yield curve also snapped back to its pre-Ukraine-invasion shape, which may signal no change in the (strong) economic outlook from the bond market’s perspective. So far so good!

        Equity markets: 

1. Tech got a bid today after being in a bear market since January. Software stocks in the cyber security area lead other software in the cloud-computing space higher. This may be a bounce, and we will look for a follow-through tomorrow.
2. Financial and Semi-conductor stocks were mixed/down. That is not a good sign because these sectors tend to be leading indicators of future economic strength or weakness. Given their much higher risk (beta), these are also considered the ‘risk-on/risk-off’ sectors given their much higher risk (beta).
3. Healthcare has been a source of relative strength for the week, showing defensive characteristics.
4. Energy stocks remained the only sector up for the year and gave up some gains today. It looks like crude oil per barrel may hit $100 tomorrow, further exacerbating inflationary pressures worldwide. It is our strategy to add to our energy weight.
5. Alternative energy stocks (like Generac) were up big today, which may be a sign of what is to come: Dependence on fossil fuels may be a fool’s game given massive underinvestment in production and now geopolitical concerns.

Despite the dramatic reversal today, we are not out of the woods yet. It will be interesting to see how European stocks react at the open tomorrow, given they did not benefit from the reversal of the US markets when these had already closed. I heard from my source at the UN that the Security Council meeting late last night was quite heated. The Russians chaired the meeting ironically, given it was their turn in the rotation. Unfortunately, there is no diplomatic solution in sight as of this writing. 

To date, the S&P500 is down just under 10% for the year, the Nasdaq is down 14.4%, and the Dow Jones Industrial Average is down 8.6%.

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.