Warning Signs? Signals From the Latest Market Moves and Parallels to the Past

By: Edward Jones
 
DEWITT, Mich. - March 9, 2022 - PRLog -- Markets remained volatile last week but exhibited some signs of resiliency, as positive economic readings helped partially soothe escalating geopolitical fears. The war in Ukraine is showing up more acutely in certain areas of the market, most notably commodity prices, inflation and interest rates.

Our assessment of the economic and market implications of the developing war is not intended to trivialize the human element and tragic loss of life associated with this situation. For the sake of this commentary, our insights are focused on financial market impacts and ways investors can consider and navigate conditions that are being influenced by geopolitical events.

Broadly, we think near-term headwinds have strenghtened, and we doubt the economic expansion will advance completely unscathed. Commodity-price shocks and tightening monetary policy are traditional occupants on the "most wanted" list for bull-market threats. We don't think this signals an impending end to the expansion, particularly given the position of strength the economy is currently navigating from. Investors should expect more choppiness ahead, but underlying conditions should offer broader support over time.

Parallels to the Past

1994: Aggressive Fed Tightening
  • Connection to today:
    • The Fed hiked interest rates seven times in 12 months amid concerns it had fallen behind the curve on rising inflation as the economy expanded.
    • Oil prices rose 49% in the first half of the year2.
  • Initial market reaction:
    • Stocks and bonds were both hit by the aggressive Fed policy move.
    • The stock market pulled back 9% from February to April2.
    • Bond returns were hurt, as 10-year Treasury bond rates rose from 5.6% to 8.0%2.
  • How it played out:
    • Stocks finished 1994 with an annual gain of 1.3% and gained another 38% in 19952.
    • Despite rising rates, bonds posted returns of 6% in 1994 and 0.6% in 1995.1

1998 Russia defaults and oil prices collapse
  • Connection to today:
    • The Russian ruble and stock market plunged, and the government defaulted on its debt as Russia's GDP declined sharply.
    • After a notable rise in the preceding year, oil prices fell more than 50% to $10/barrel2.
  • Initial market reaction:
    • Following a 90% rise in the S&P 500 powered by rising technology stocks, the stock market fell 19% in 30 days2.
  • How it played out:
    • Stocks finished 1998 with an annual gain of 29%, and gained another 21% in 19992.
    • Bonds provided portfolio stability against 1998's equity-market volatility, posting an 8.7% gain for 1998, followed by a -0.8% return in 1999 as the Fed began raising rates.1
Sources: 1. Bloomberg. Bond returns measured by the Barclays U.S. Aggregate Bond Index. Stock market returns measured by the S&P 500 Index total return. 2. FactSet

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