How geopolitics impacted February’s market and what that means for investors

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Investors were faced with uncertainty in February as geopolitical tensions added to worries around the first Fed rate hike in over three years. The S&P 500 fell 3.1% during the month and briefly entered correction territory (i.e., a decline of 10% or more from its recent peak) before rebounding somewhat, while the Dow declined 3.5%. The Nasdaq, already at correction levels, slid another 3.4%. Not surprisingly, the VIX index of stock market volatility rose to 30.15 while the 10-year Treasury yield ended the month at 1.82% after briefly surpassing 2%. What drove these market moves in February?

 
The Russian invasion of Ukraine had the greatest influence on the market

The situation in Ukraine is still evolving, but the conflict is intensifying with Russian troops entering the country and attacking major cities, including the capital Kyiv. The US, Europe, and NATO allies have imposed sanctions on Russian officials and companies in response, including isolating Russia from the SWIFT system of international payments.

While the humanitarian crisis is the top concern, financial markets have endured many geopolitical conflicts in the past. These include: the attacks on September 11, the war in Iraq, the so-called Arab Spring, Russia’s annexation of Crimea in 2014, periodic North Korean missile crisis, tensions between China and the US, the US’s exit from Afghanistan last year, and many more.

Historically, markets recovered from these events. While there are always geopolitical impacts and humanitarian consequences, the stock market tends to follow business cycles more than daily geopolitical headlines. This was true even in the 20th century which experienced many bull markets during the Cold War. But will the current Russia/Ukraine conflict increase inflationary pressures on the economy?

Energy prices continue to rise as Fed liftoff in March nears

The price of Brent crude rose to about $101 per barrel as the situation in Ukraine worsened. Higher oil and gas prices could continue to fuel inflation and rising prices for consumers. Energy prices had already been increasing steadily throughout the pandemic recovery due to strong economic demand, and there’s no sign of slowing down as the Fed prepares the ground for its first pandemic interest rate hike.

As of today, the Fed is still widely expected to hike interest rates at its March 15-16 meeting, although the size of the rate increase could be affected by geopolitical uncertainty. In total, markets now anticipate six to seven rate hikes this year due to high inflation rates. It’s important to remember that Fed tightening and rising interest rates are normal at this stage in the business cycle.

Chart of the month

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Oil prices have surged due to the Russia/Ukraine conflict. Oil prices had already been steadily rising throughout the economic recovery. Sources: Clearnomics, Refinitiv

 
Here’s why you should stay the course despite the uncertain climate

February is a reminder that, for long-term investors, facing periods of geopolitical risk is unavoidable. Headlines on regional and global conflicts can be alarming since they are unlike the typical flow of business and market news. These events are also difficult to analyze and their outcomes challenging to predict. In these situations, it’s often better to hold a properly diversified portfolio and stay level-headed than to try to guess exactly what happens next.

[Disclosures]

Sources: Clearnomics, Refinitiv

This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, MoneyLion does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information. For more information about MoneyLion, please visit https://www.moneylion.com/terms-and-conditions/.

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