The first quarter of 2022 saw both stock and bond markets endure a turbulent period against a troubling geo-political and economic backdrop. The ever higher inflation prints across much of the developed world would have been difficult enough for market participants to navigate – however, in combination with the invasion of Ukraine by Russia, this has resulted in some extremely volatile sessions. The S&P 500 shed 13% from 3rd January to 8th March, before rallying 8.6% to close the month at 4,530. Similarly, the tech-heavy NASDAQ fell 20.5% from the start of the year to its low on 14th March, before managing to claw back 13% to close at 14,220 on 31st March. The S&P Euro Plus also fell 18.2% from its 5th January peak to 8th March, before further rallying 10.8%. Closer to home, the FTSE All-Share enjoyed a much easier ride owing to its high weighting in energy and financial stocks, closing just 2% down over the period at 4,188. Within these broad market falls, a clear rotation away from companies whose share prices are based heavily on potential future earnings growth into more cyclical, such as energy and financial, stocks has taken place.
The US Federal Reserve released the minutes for their December meeting on 5th January, which provided the catalyst for the early year drawdowns. In it they stated, “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated”, whilst also indicating they are likely to pursue tapering their asset purchasing scheme at a more aggressive pace. The persistence of inflation has been the cause of this change of tack, and it has been unrelenting, with inflation having now reached a substantial 8.5% in the US for the 12 months to March 2022, 7% in the UK, and 7.5% in the Eurozone. In an attempt to quell the flames of an overheating economy, the Bank of England became the first major Western central bank to begin raising rates at the end of 2021 and followed that by consecutive increases of 0.25% in February and March, with the present bank rate of 0.75% now matching the level it was pre-covid.
Throughout this period, the world has been transfixed by events in Ukraine. January and most of February saw high ranking Russian officials repeatedly claim they would not invade, yet simultaneously issue security demands of Ukraine and NATO, feared by many Western nations as an attempt to rationalise war. These fears were proved correct on 24th February when the invasion began. International condemnation was swift and intense, with many countries announcing a continuing slate of wide-ranging sanctions intended to cripple the Russian economy. Amongst these were the expulsion of Russia from the SWIFT global messaging network for international payments, the banning of Russian airlines over most European and North American airspace, and asset freezes on the foreign-exchange reserves of the Russian central bank. This move was particularly significant as Russia had managed to build up $630 billion in reserves with an eye on softening the blow of inevitable sanctions – indeed former deputy Russian finance minister Sergei Aleksashenko summed it up by calling the measures “a kind of financial nuclear bomb that is falling on Russia”.
Despite a mostly united Western response, there has been tension surrounding any potential sanctions on Russian energy imports. Russian gas accounts for around 40% of the EUs natural gas imports and there are very real fears, especially amongst Italy and Germany, that a blanket ban could leave them extremely exposed to punishing movements in wholesale gas prices. With inflation running rampant across the continent, increases in energy costs will only serve to intensify the rise in prices and fuel fears that stagflation will occur – a worst of all worlds scenario whereby high inflation is combined with slow or negative economic growth.
Looking East, there has also been interest in the response of China to the war in Ukraine. Beijing has so far not come out against Russia with the same alacrity as the West, having abstained on a UN Security Council draft resolution on 26th February calling for Russia to stop attacking Ukraine and withdraw all troops. However, they have said they respect the sovereignty of Ukraine and other nations. Conversely, in their attempt to pander to Russia and balance their position, they have additionally said that Russia’s security concerns must be heard, describing the US ‘as the culprit and leading instigator of the Ukraine crisis’. They have also said they will maintain normal trade with Russia and have refused to call the attack an ‘invasion’. With China’s long-standing strategic aims more focused on destabilising US influence, this immediate policy of fence-sitting will no doubt continue for the foreseeable.
Whereas the short term future will undoubtedly be filled with additional volatility and uncertainty, the old adage that ‘time in the market beats timing the market’ has always historically proven to be a shrewd investment move. By having a clear focus on longer-term financial aims, significant and seemingly devastating market events such as the Great Financial Crisis, the dot-com bubble bursting, and the Coronavirus outbreak were able to be weathered by staying invested, navigating the volatility whilst it lasted, and then subsequently participating in the market recovery once events settled.