Russia-Ukraine Conflict Results in Draw for Investors

February 25th, 2022

Bulls and bears managed to reach a détente despite the conflict in Ukraine escalating this week. After months of building up forces along Ukraine’s border, Russia launched its invasion of the country in the early hours of Thursday morning. The operation took place both by ground and air across several key locations around the country. The breadth of the operation initially spooked markets with the Dow plunging 800+ points at the open. In the melee, the NASDAQ index fell into bear market territory, down -20% from its all-time high. Bond markets provided cover as investors flocked to the safety of the 10-year treasury, which pushed yields below the key 2.00% level. By the close of trading on Thursday, however, bulls managed to find comfort both in the Western nations’ response and in the conflict’s implications for domestic monetary policy, resulting in most U.S. equity indexes gaining on the day. With all eyes on Ukraine, markets generally ignored the week’s economic reports on personal spending and durable goods which showed the U.S. economy is still running strong. News of potential Russian and Ukrainian negotiations sustained the bulls’ momentum on Friday and resulted in most equity markets finishing up for the week.  
Rising Prices Fail to Hold Back Consumers
High prices in January failed to deter consumers, who increased the value of their expenditures by 2.10% for the month. This managed to beat estimates of 1.60%. Spending rose even as the core personal consumption expenditures price index, the Federal Reserve’s primary inflation gauge, increased 5.20% from year ago levels (excluding food and energy). That was its highest level in nearly 39 years and well above its 2.00% target level. The strong spending number is not all good news, however. The spending growth rate is reported in current dollars, meaning that it includes the impact of inflation. Controlling for inflation, spending was still higher by 1.5%, but that only went to negate the -1.3% real spending experienced in December. Personal income was flat in January as the end of child tax credits more than offset wage gains and an upward inflation adjustment to social security checks. In real terms, personal income actually declined -0.5%. The personal savings rate also continued to tick lower. That helped support spending and signals consumers remain confident in the economic outlook, but at the same time it reduces their buffer should we experience a slowdown. The personal savings rate dipped to 6.40%, which is below the pre-pandemic level of 7.80%. While the headline reading may have initially seemed rosy, the number itself masks the impact inflation is having on families and with international events disrupting oil, food and commodity markets, the consumer is likely to start really feeling the impact further in the coming months. 
Durable Goods Orders Soar
Orders for long-lasting goods jumped 1.60% in January, beating expectations for a 0.80% gain. The increase was driven by a 3.40% increase in orders for transportation equipment. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.90% month-to-month. That’s up from the 0.40% rise in December. Durable goods readings have been consistently strong over the past twelve months. More importantly, the capital goods portion of the durable goods report was particularly strong in January. These are orders, shipments, unfilled orders and inventories of equipment companies use to actually produce end goods – typically consumer goods. Within the report, however, there is a section that specifies defense orders, and given the conflict unfolding in the Ukraine, we thought it might be heartening to point out that defense-specific, capital goods orders increased 15.7%, while defense-specific, capital goods shipments increased 4.2% in January. We can only hope that this equipment will soon be busy producing munitions and equipment that will give ’em hell on the front lines in defense of freedom.
Wars evoke a macabre curiosity. Part of it is the fascination in seeing all the military power and technology on display, but on a more humanistic level, wars play to our basic values. Democracy versus dictatorship. Security versus terrorism. Good versus evil. For markets, however, wars are more nuanced, which helps explain why as the world condemned Russia’s unprovoked attack on the sovereign nation of Ukraine, U.S. markets were little changed. Russia militarily punches far above its economic weight class. Depending on the price of oil, Russia’s economy is roughly the size of South Korea’s or Italy’s–and slightly smaller than Texas’. For the U.S., the direct economic ties to Russia and Ukraine are very limited. The more diffused economic impact comes via the conflict’s disruption to commodities markets, the potential for additional supply chain problems, and slower global economic growth. Ukraine is a key supplier in global agriculture. According to the USDA, Ukraine is forecasted to account for 12% of global wheat exports and 16% for corn. Russia, for its part, is a major oil producer and one that is deeply integrated in Europe. The conflict’s disruptions to the food and energy sectors have the potential to compound factors that are already contributing to high global inflation. While that is a concern, markets were ultimately comforted that the harshest of sanctions were not implemented, which will allow oil to continue flowing. At the same time, markets now believe the Fed will be more cautious in raising rates given the uncertainty to economic growth the conflict now introduces. As sad as it is, markets are making the same bet Putin has already made, which is that the sting of sanctions won’t be severe enough to materially change the conditions on the ground.

The Week Ahead

With tensions high amid the Russia-Ukraine conflict, economic data could once again take a backseat. Jobs, manufacturing, and services reports are all on deck for next week.

Who Won the Games? 

While geopolitical tensions dominated headlines, the Winter Olympics concluded its two-week competition with significantly less fanfare than previous Games. The 2022 Beijing Olympics had the smallest prime time audience in history for any Winter Games with an average of 11.4 million viewers each night compared to 19.8 million nightly viewers for the Pyeongchang Games in 2018. 

The Games featured 109 medal events across the following 15 sports:
– Alpine skiing
– Biathlon
– Bobsled
– Cross-Country Skiing
– Curling
– Figure Skating
– Freestyle Skiing
– Hockey
– Luge
– Nordic Combined
– Short Track
– Skeleton
– Ski Jumping
– Snowboarding
– Speed Skating
It is not surprising that Norway, which has historically dominated winter sports, not only won the most medals overall with 37, but their athletes also won the most gold medals at 16, breaking the record for the most gold medals in a single Olympics. 
Second place by total medal count went to ROC (Russian Olympic Committee), which is a code name for Russia after the country was banned from all international sporting competition, including the Olympics, following a state-sponsored Olympic doping scandal in 2016. Russian athletes who were not involved in the doping scandal have been allowed to compete as neutrals, and not under their home country’s flag, for the past three Olympics. The ROC competitors cannot display national emblems or symbols, and the Russian national anthem is forbidden. Instead of hearing their anthem when they win, Russian athletes hear Tchaikovsky’s piano concerto. This is supposedly the final Olympics in which the Russian team will go by a pseudonym. 
Germany came in third in the overall medal count, but they won more gold medals at 12 than the ROC’s 6 golds. Fourth place went to Canada with 26 medals, just edging out the U.S. who came in fifth with 25 medals. Sweden, Austria, and Japan tied for sixth place with 18 medals each. The full medal count is available here.
Seven Events Made Their Debut
The 2022 Beijing Olympics debuted seven new winter events in snowboarding, bobsled, and skiing. These events include women’s monobob, which is so new that spellcheck doesn’t recognize the word. In monobob, just one person pushes a massive sled weighing over 350 pounds before leaping into it and steering it down an icy track at around 75 miles per hour. Two U.S. athletes — Kaillie Humphries and Elayna Meyers Taylor — won gold and silver respectively in the first Olympic women’s monobob competition. Humphries became a U.S. citizen in December 2021 in order to compete for Team USA after a fallout with her Canadian team. With the introduction of the women’s monobob, there are now two women’s bobsled events (the solo and the two-person). Men compete in the two-person and the four-person bobsled. Other events that debuted this year include men’s and women’s big air skiing, mixed team relay in short track speedskating, mixed team ski jumping, mixed team snowboard cross, and freestyle skiing mixed team aerials.
No Snow and No Dough
This was the first Winter Olympics to rely almost entirely on artificial snow. In other Games, host countries would rely on their natural snow and supplement it with artificial snow to add extra layers to the base snowpack. Fake snow was the plan ever since Beijing was awarded the Winter Olympics. The area simply doesn’t get a ton of precipitation, particularly in January and February. In order to create enough snow for the events, there were reportedly over 100 snow generators, 300 snow-cannons, and 51 high-pressure pumps to cover the ski slopes, which produced enough artificial snow to fill two Empire State Buildings. It was estimated that the snow production required nearly 360 million gallons of water (which could fill 545 Olympic-sized swimming pools). When Beijing bid to host this year’s games in 2104, it planned to spend just over $3 billion. The Wall Street Journal reported that China spent at least $16 billion, including more than $9 billion for a high speed rail linking Beijing to nearby ski resorts, but some estimates have been much higher. COVID resulted in loss of revenue from ticket sales and from thousands of sponsors, media, and spectators visiting the host city in the months leading up to and following the Olympics. Hosting the Olympics tends to result in a tremendous economic burden, and oftentimes the large sports venues built specifically for the event are too costly to maintain and end up being torn down or abandoned. Chinese officials believe that hosting the Games will generate future tourism spending, spark an interest in winter sports, and result in ongoing utilization and monetization of the massive infrastructure improvements and sports facilities constructed for the Olympics.

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