February was in many ways a continuation of January’s tough market environment. Large US stocks shed roughly 3%, while US small caps fared better with modestly positive returns for the month. Outside the US, emerging market stocks also fell about 3% and developed market stocks suffered a near 2% decline.
Yields on US treasuries rose which led to price declines for bonds that outpaced any yield that may have been generated. In the credit markets there was some additional spread widening that led to incrementally higher bond price declines for riskier borrowers.
There are two dominant topics among investors and market participants: inflation and geopolitics. The two topics are related, as geopolitical issues have led to large increases in a variety of commodities over the past month or so. Commodity prices represent the intersection of supply and demand. Increases in prices are usually due to high demand or constrained supply. Unfortunately, demand is high and/or rising at a time when supply has, or is expected to, become more constrained. Over the long term, supply and demand imbalances have a way of working themselves out but the short term is painful, and no one knows how long it may take to get to the long term or if price equilibrium in that long term is structurally higher.
We are also seeing events that have not happened in a long time. As we write this, the ruble has collapsed, and the Russian stock market remains closed. According to the latest GDP figures from the World Bank, Russia is the 11th largest economy in the world and represented nearly 2% of global GDP. What’s remarkable is the speed at which an economy of that size has become the international equal of North Korea. The response from the West seems like a watershed moment for globalization, which seems to be in retreat.
All of this is to say that it seems clear that the conflict in Ukraine should have some impact on the global economy and a significant impact on the European economy. While there are risks and uncertainties, the US economy seems positioned to handle the disruption relatively well. However, we note that the stock market and the economy are not one and the same.
Our thoughts and prayers are with the people of Ukraine and those impacted by the current situation in the region.