Sightline Weekly Market Update: Inflation, Ukraine Crisis Hits Consumer Sentiment
The Russian and Ukraine crisis dominated the news cycle for another week as the human tragedy played out before us on minute-by-minute news coverage. Except for the TSX, North American equities continued lower, ending another volatile week in which the Nasdaq fell mid-week to 22% below the recent high before recovering by week’s end. The TSX managed to finish the week in positive territory despite the oil price falling to $109.16 (down 5.6%) after hitting an intra-week high of $126.51 in USD. The Dow Jones fell roughly 2%, the S&P500 lost 2.88%, dragged lower by consumer stocks announcing the termination of business in Russia. The Nasdaq finished the week dropping 3.53%, the S&P400 Mid-Cap fell 1.71%, and the Russell 2000 slid 1.06%. In Europe, investor sentiment improved in hopes of a settlement to the Russia-Ukraine war. The pan-European STOXX Europe 600 Index finished the week gaining 2.23%. The German DAX Index jumped 4.03%, while France’s CAC 40 advanced 3.28%, and Italy’s FTSE MIB Index rose 2.57%. The UK FTSE 100 Index gained 2.41%.
The economic data for the week was in line with expectations. The Bureau of Labor Statistics reported the Consumer Price index increased by 0.8% in February after a 0.6% rise in January. The all-items index rose by 7.9% over the last 12 months, the highest level since August of 1982. Core inflation, excluding gas and food, rose 6.4% during the previous 12 months. The most significant increases came in gasoline, shelter, and food indices. The gasoline index rose 6.6%, accounting for one-third of the total increase in the all-items index.1 Economist surveyed by Dow Jones expected a 0.7% increase for the month and 7.8% for all items for the 12 months ending.2
The University of Michigan Surveys of Consumers for March was released on Wednesday, showing continued weakness in the sentiment reading coming in at 59.7 after a February reading of 62.8. Year-over-year, the reading is down 29.7%. The sub-indices also fell, with the Current Economic Conditions slipping to 67.8 from 68.2 and the Index of Consumer Expectations having the steepest decline to 54.4 from 59.4. The decline in sentiment is attributed to falling inflation-adjusted income caused by the acceleration of fuel prices triggered by the Russian invasion of Ukraine. The survey also reported expectations for personal finances to worsen by the largest proportion since the survey began in the mid-1940’s. The only bright spot in the survey was for the job market.3
The latest JOLTS survey released by the Labor Department on Wednesday showed little change with job openings at 11.3 million on the last business day of January. The hires and separations data changed little, at 6.5 million and 6.1 million, respectively. The quits rate slipped slightly to 2.8% to 4.3 million, declining by 151,000. The largest decrease in the quits rate was in the Midwest region.4 The initial unemployment claims increased by 11,000 to 227,000, and the continuing claims for all programs showed a decrease of 62,259 to 1,909,025. For the same period in 2021, the total claims for all programs were 20,837,008.5
There is a general feeling that once the Russian and Ukrainian conflict is resolved, economic conditions will return to normal, and it will be business as usual. More likely, a new normal will assert itself. The damage done by sanctions, especially extending sanctions beyond countries to individuals, will not be easily forgotten nor repaired quickly. The world economy is being split in two, which will result in persistent inflation driven by shortages or supply-side issues. It will take time for the two new economies to adjust before we see the side issues resolved and inflation subside. Higher interest rates work in periods of speculation but are not effective and become counter-productive against supply-side problems. We continue to expect more volatility as we move forward; however, we could see a significant improvement in equity valuations, repairing much of the recent damage once the conflict is resolved. Geopolitics is in the driver’s seat for the time being and will need to be closely watched.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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