All three major stock market averages notched their second straight winning week. The stock market’s rebound has come even as the war in Ukraine continues with little sign of being resolved shortly and with interest rates shooting higher as the Federal Reserve stays on track to raise rates throughout the year. But the impact could be far more drastic. The economic globalization seen since the end of the Cold War could be coming to a close, which relied heavily on the interconnectedness of national economies for cross-border movement of goods, services, technology, and capital. Protectionism and self-reliance have stepped in over the last few years, replacing free trade agreements and the promotion of economic liberalization. What started off as trade wars and increasing tariffs has morphed into an outright rejection of the complex multinational supply chain, with pandemic restrictions exacerbating supply shortages and now the war in Ukraine endangering food and energy security.
For investors, the dramatic change in global order is one that the markets were not prepared for. Stock markets hate uncertainty. The Ukraine war could end in the next few days or could last for decades. But wars do end. What should investors do now with their portfolios?
Future Wealth’s View
Putin is now facing his own “Shock and Awe” moment – made famous by Donald Rumsfeld’s comment on the US invasion of Iraq. Much like Rumsfeld, Putin completely misjudged the strength of his own military capabilities and that of Ukraine, leaving his war strategy in shambles. But, the bigger impact has been the sanctions that have hit Russia’s economy to the point where Putin now has to sell gold reserves to keep the Russian economy alive.
Putting Russia aside for the moment, there are a few key announcements coming up that could send the market back down after the recent run up – Fed’s announcement in April of possibly a 50 bps increase in interest rate and the latest CPI indicator on inflation. If the inflation number shows no sign of slowing down, another interest rate hike in May is almost a given. The market may not take well to it.
Investors and Putin would be wise to pay heed to Rumsfeld’s other famous quote – “There are known unknowns and unknown unknowns”.