War, Volatility, Energy Prices, and You (March 1 Special Edition)
War, Volatility, Energy Prices, and You
The last time we wrote an intra-week note was March of 2020 as the original Covid variant was breaking free and causing global havoc with brutal health consequences and extreme market volatility. Today we find ourselves in much the same position regarding volatility and the uncertainty that lies ahead.
While we do not know what the future holds for Ukraine and their fight against the Russians, we are confident that markets will rebound again and continue their growth path.
In the meantime, we rely on our portfolios, which are well positioned to weather upheavals such as these, and specifically the fixed income therein. Those positions have provided a hedge against the market downturn this week. Since Friday evening, the US10YR yield has fallen from 2.03% to 1.707% signifying price appreciation of our fixed income positions.
The US economy is strong. Unemployment is low. Earnings continue to be impressive and economic data points are trading roughly in line with expectations. While increased oil and commodities prices are a headwind for the economy, this recent volatility has reduced the fear that the Fed will raise rates too high too quickly. There was talk that this month’s Fed meeting might see a 50 bp increase. Over the last two days, that possibility has shrunk to near zero. Further, the markets have reduced the number of hikes expected this year from seven to five.
At these prices, US shale producers are easily profitable. North America rig counts stand at 874 vs 565 at this time last year, a 309-rig increase. We should expect rig counts to continue to increase rapidly over the next several weeks and months. Further, political pressure will be brought to bear on OPEC to increase production. On a positive long-term note, while the current crisis will necessitate a short-term increase in fossil fuel production, the Russian war will speed up Europe’s transition to alternative energy production.
Recall that at the end of the first quarter of 2020, with the horrors of Covid very much in front of us, with nearly two full years of self-isolating, mask wearing, and virtual learning still to come, the S&P 500 was down 30%. From that time, the markets rallied strongly and finished the year +16%. Lastly, in times of great volatility, I have always found the following chart to be of some comfort.
Please know that we are carefully monitoring events as they unfold and if you have any questions or concerns, please reach out to us.
Marin Wealth Advisors