Hope you are all doing well. Markets ended lower this week, as tensions between Russia and the Ukraine continued to take center stage, driving market volatility and a flight to safe-haven assets. Financial markets have already been struggling with the prospects for higher inflation and tightening by the Federal Reserve. The current situation has some financial pundits comparing the current events to 1979. In 1979, financial markets reacted poorly when energy prices spiked after the Shah of Iran was overthrown, and Iran’s oil production plunged and the Fed tightened monetary policy to deal with inflation. The comparison is wrong for a couple reasons which I will break down using quotes from Monty Python’s Life of Brian which was released in 1979.
Well, what are you doing creeping around a cow shed at two o'clock in the morning? That doesn't sound very wise to me.— Mandy Cohen (Brian’s mother)
Like the wise men in the movie following the signs to the wrong place. That is what those dropping the 1979 comparison are doing here. Today’s inflation is unlike the runaway price levels back then. Admittedly, the post-pandemic price surge has been uncomfortably sharp, but I still don’t believe it will be as persistent nor that it will attain the peak levels reached in 1980. Inflation is still a supply and demand issue. Compared to 1979, there is exponentially more global trade today and technology has significantly boosted productivity. We can address supply shortages faster.
There shall, in that time, be rumors of things going astray, errrm, and there shall be a great confusion as to where things really are.— Boring Prophet
Let’s not confuse where things really are. We are not going to see lines at gas stations, odd-even rationing based on your license plate and I don’t expect President Biden to make a “Crisis of Confidence” speech like President Carter. The United States has become self-sufficient in energy over the past decade. This reflects both energy conservation on the demand side and development of shale oil production on the supply side. Only 10% of the oil the U.S. imports is from Russia. The impact will be felt a little more in Europe where Russia supplies 40% of the natural gas. A spike in natural gas prices could impact the price of oil, as countries would likely switch away from natural gas. The magnitude of energy price increases envisioned by most analysts would be more in line with the two U.S. conflicts with Iraq. The two gulf war spikes 1990 and 2003 had much less powerful effects on the economy and markets than the spike in 1979.
It is never comfortable to see your investments lose value but the right thing to do here is to stay the course even if it gets worse before it gets better. Corporate earnings and economic growth are always the main drivers of the stock market long term and both remain strong. The U.S. economy is proving to be resilient, with economic growth still above trend. Corporate earnings remain stellar and the retail sales data released this week shows consumers are still spending. If you’d like to speak about your investments or your plan, my calendar link is below and you can schedule a phone or zoom appointment at any time.