Worries over geopolitical strife and a more belligerent Fed combined to send the S&P 500 down almost 10% from its all-time high reached in early January.
The benchmark recently lost around 1% on Tuesday as investors waited for the US to announce potentially tough new sanctions against Russia after Moscow’s decision to recognize the independence of two breakaway regions of Ukraine and Russia. send troops there.
Nonetheless, some analysts maintained that the longer-term impact of the geopolitical disputes may be fleeting, and urged investors not to overreact to recent market moves.
“We see no reason to panic at this stage,” said Charles Henry Monchau, head of investments at Banque SYZ Geneva, Switzerland. “While most Western media commentary sounds alarming, we may actually be approaching the ‘peak of fear’ over this crisis and there is a strong likelihood that tensions will begin to ease from here.”
Monchau maintained its exposure to equities while allocating part of its portfolio to gold, a popular refuge in times of political or economic uncertainty.
How the escalating confrontation in Eastern Europe could impact Fed actions has been a major topic of debate. While some worry that rising oil prices – which are hovering around their highest level since 2014 – could drive up inflation and force the central bank to become even more aggressive, others think the market uncertainty could dampen the central bank’s hawkish stance.
The markets are currently valuing around 165 points for the rise in interest rates by next February. [FEDWATCH]
“Too tight monetary policy could lead to outright policy error, especially if the economic cycle continues to deteriorate,” wrote Dubravko Lakos-Bujas, head of equity market strategy at JPMorgan, in a statement to the public. investors. “The Russia/Ukraine crisis may force a reassessment of the Fed’s tightening path, causing central banks to become less hawkish, while policymakers may consider additional fiscal stimulus.”
Deutsche Bank’s Jim Reid pointed to the bank’s data on how markets have behaved in past geopolitical crises. Collapses in the S&P resulting from geopolitical events have generally been short-lived, with the index falling some 6-8% on average, taking three weeks to bottom and another three weeks to recover to prior levels.
“Ultimately, the underlying economic backdrop tends to dominate, so if you believe the model, a lot could depend on what you thought was the momentum before the sell-off,” Reid wrote in a statement on Monday.
Analysts at Truist Advisory Services said a recent slump in investor sentiment could strengthen the case for buying stocks.
The most recent survey from the American Association of Individual Investors showed that the percentage of investors who think stocks will be higher in six months has fallen to 19.2%, its lowest level since May 2016. The S&P 500 was higher three months later in 94% of cases, with an average gain of 6.7% after similar past readings, Truist analysts wrote in a note on Tuesday.
“Historically, military/crisis events have tended to inject volatility into the markets…but equities tend to rebound eventually unless the event pushes the economy into recession,” they added.
Nevertheless, most analysts expected the conflict to continue to disrupt markets in the short term.
The dispute “just prolongs the uncertainties in the market,” said Peter Cardillo, chief market economist at Spartan Capital Securities New York. “These uncertainties are synonymous with negative sentiment and therefore even positive news is simply put on the back burner.”