Notes from our friends at Raymond James
Posted: Wed Feb 23, 2022 10:27 am
Please see the attached research piece authored by a handful of Raymond James' thought leaders. Below are a few poignant excerpts. In times like these it's beneficial to remember we are investing for the long-term. There certainly will be hurdles to be overcome along the way. No two scenarios play out exactly the same but history tells us that the markets/economies are resilient & will get back on course.
" Past geopolitical events (e.g., wars, terrorist attacks and other events) have historically led to short-term weakness in the equity market. However, as economic growth and earnings are the longer-term fundamental drivers of the equity market, they have tended to recover their losses and rally over the ensuing six and twelve month periods. The exceptions tend to result when these events adversely affect the fundamental backdrop of the economy."
"In summary, inflation and the Fed remain the most crucial variables for the equity market. We have written that multiple headwinds appearing at one time often influence more significant and longer-lasting market weakness than would otherwise be seen by one item alone. The Russia/ Ukraine situation qualifies as one of the 'other' headwinds. So, the already struggling equity market will likely continue to do so for now. As for the conflict itself, it all depends on to what degree it escalates. The most significant risk is the upside pressure on crude oil and natural gas, especially with the world currently wrestling with inflationary pressures. The higher prices would weigh on consumer spending. The European Union (EU) region is at greater economic risk given its dependence on energy supplies from Russia. However, the US consumer will also feel the hit from the higher prices. If the conflict escalates and the west responds with aggressive sanctions, Russia could counter by limiting supplies of energy to the EU, providing upward pressure on prices. The higher inflation and pressure on the consumer would put the Fed in the awkward position of fighting inflation when an economic headwind appears."
"The Russia/Ukraine crisis will contribute to a market already struggling with the coming transition to tighter monetary policy. However, we doubt the conflict can grow to the point of triggering an economic contraction, and, therefore whatever degree of decline equities experience is likely short-lived. At best, trying to calculate downside levels when markets are trading on emotion is guesswork."
"Why does this matter for the oil market? Because Russia produces approximately 10% of the world's oil supply - on par with the US and Saudi Arabia - and half of that production is sold into the European market. Russia's natural gas production - three-quarters of which goes to Europe - would be impacted to an even greater extent. In the event of war, oil and gas pipelines would be at high risk of damage, even if neither side is targeting them deliberately."
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MY TAKE: There is a lot of "noise" impacting energy prices. Russia invading Ukraine could become a "Big Noise", but I hope and pray that Putin's goal is just to take control of Ukraine. Europe cannot do anything to cut off their supplies of oil and gas from Russia; it would crush the European economy. Even the idiot son Team Biden know this, which is why they are eager to get deal done with Iran. As I have posted here many times, doing anything to allow Iran to get weapons grade uranium could make all of the previous Team Biden screw-ups pale in comparison. IMO this increases the geopolitical risk in the Middle East.
Additional oil from Iran will not solve the world's energy crisis. Global oil demand is now expected to rise to 105 million bpd by the end of 2023 and I do not see how oil supplies can rise fast enough.
" Past geopolitical events (e.g., wars, terrorist attacks and other events) have historically led to short-term weakness in the equity market. However, as economic growth and earnings are the longer-term fundamental drivers of the equity market, they have tended to recover their losses and rally over the ensuing six and twelve month periods. The exceptions tend to result when these events adversely affect the fundamental backdrop of the economy."
"In summary, inflation and the Fed remain the most crucial variables for the equity market. We have written that multiple headwinds appearing at one time often influence more significant and longer-lasting market weakness than would otherwise be seen by one item alone. The Russia/ Ukraine situation qualifies as one of the 'other' headwinds. So, the already struggling equity market will likely continue to do so for now. As for the conflict itself, it all depends on to what degree it escalates. The most significant risk is the upside pressure on crude oil and natural gas, especially with the world currently wrestling with inflationary pressures. The higher prices would weigh on consumer spending. The European Union (EU) region is at greater economic risk given its dependence on energy supplies from Russia. However, the US consumer will also feel the hit from the higher prices. If the conflict escalates and the west responds with aggressive sanctions, Russia could counter by limiting supplies of energy to the EU, providing upward pressure on prices. The higher inflation and pressure on the consumer would put the Fed in the awkward position of fighting inflation when an economic headwind appears."
"The Russia/Ukraine crisis will contribute to a market already struggling with the coming transition to tighter monetary policy. However, we doubt the conflict can grow to the point of triggering an economic contraction, and, therefore whatever degree of decline equities experience is likely short-lived. At best, trying to calculate downside levels when markets are trading on emotion is guesswork."
"Why does this matter for the oil market? Because Russia produces approximately 10% of the world's oil supply - on par with the US and Saudi Arabia - and half of that production is sold into the European market. Russia's natural gas production - three-quarters of which goes to Europe - would be impacted to an even greater extent. In the event of war, oil and gas pipelines would be at high risk of damage, even if neither side is targeting them deliberately."
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MY TAKE: There is a lot of "noise" impacting energy prices. Russia invading Ukraine could become a "Big Noise", but I hope and pray that Putin's goal is just to take control of Ukraine. Europe cannot do anything to cut off their supplies of oil and gas from Russia; it would crush the European economy. Even the idiot son Team Biden know this, which is why they are eager to get deal done with Iran. As I have posted here many times, doing anything to allow Iran to get weapons grade uranium could make all of the previous Team Biden screw-ups pale in comparison. IMO this increases the geopolitical risk in the Middle East.
Additional oil from Iran will not solve the world's energy crisis. Global oil demand is now expected to rise to 105 million bpd by the end of 2023 and I do not see how oil supplies can rise fast enough.