What Happened in the Market This Week?
Market Insight for 3rd March - 9th March
The US market ended up closing flat last week, with a bounce towards the end of the week after sanctions on Russian companies were less harsh than expected. Meanwhile, the market is actually up 4.8% over the past year. Looking forward, earnings are forecast to grow by 13% annually.
- Russia’s invasion of Ukraine has drawn sanctions from governments worldwide.
- Brent Crude Oil hovers near $103 per barrel, just shy of the high of $105 reached last week.
- A potential 0.50% rate hike in March from the Federal Reserve is possible due to high inflation figures.
Why did it happen, and how can it impact investors?
Russian Invasion of Ukraine
The bounce in markets observed during Thursday and Friday last week appear to be related to the announcement of sanctions on Russian businesses and individuals closely tied to the Putin regime. Prior to the close of trading on Friday, governments had stopped short of cutting Russia off from the SWIFT payment network. Notably, the energy sector was spared from the worst of the sanctions, ensuring that Russian oil and gas can continue to flow to Europe.
Germany is most the most dependent on Russian gas, since it is used to generate half of the country’s energy needs. It has become more reliant in recent years as it announced the early decommissioning of nuclear power plants. However in a speech on Sunday, German Chancellor Olaf Scholz announced a major policy shift, which includes the building of two new LNG terminals, likely to benefit german utility companies such as RWE. Analysis of the German energy sector can be found here.
The increased focus on energy supply in the new global context will likely see governments around the world re-evaluating energy policy, potentially creating opportunity in the sector. You can find a list of US Oil Stocks or Energy Stocks in our Discovery page.
Oil Markets
Oil prices have been increasing steadily for months now as supply remains relatively tight due to some production issues and increasing demand as economies open up. According to the New York Times, “Russia produces 10 million barrels of oil a day (roughly 10 percent of global demand) and is Europe’s largest supplier of natural gas, a critical fuel for power plants and for heat”. Since Russia provides 10% of the world’s oil, prices could increase even further if supply from Russia is tightened or sanctioned. However, the US only imports 3% of its oil demand from Russia, and is currently in talks with Iran to close a nuclear deal, which might alleviate some of the shortfall if there are sanctions placed on Russia.
Oil is a fundamental part of the worlds economy (transportation, power generation, etc), so as supply tightens and demand increases, prices rise. This can have the flow on effects of increasing prices in certain goods and services that rely on the commodity, from producing food and consumer goods to the fuel for our cars/trucks/planes/boats. If businesses that are hit with higher inputs (restaurants, retailers, farmers, airlines, etc) can’t pass the cost increases on to consumers, then they’re likely to see their profit margins decrease. So you want to identify company’s with pricing power (where consumers are still willing to pay for it despite the higher cost).
Interest Rates
St. Louis Federal Reserve President James Bullard warned recently that urgent action was needed by central banks to combat the high inflation that’s occurring. He called for a full 1% increase in rates by July this year. Market expectations already appear to be expecting a hike in March since the Fed has indicated as much, but there’s still some uncertainty about whether it would be a 0.25% hike, or a 0.50% hike. For the whole of 2022, it appears that markets are mostly expecting 5 or 6 rate increases of 0.25% each.
If interest rates increase, those stocks with a lot of their value derived from distant future cash flows are the most impacted, since those cash flows are worth less if we discount them back to today’s value at a higher rate. Therefore, High Growth stocks are usually negatively impacted the most. We have a video that goes into more detail: Growth Stocks, Interest Rates and Tapering - Explained.
Some stocks benefit from higher interest rates, primarily Banks, Financial firms (given they often earn a spread between what the money costs them and what they can lend it out to consumers at) and sometimes Consumer discretionary (given higher interest rates typically means the economy is strong).
Stocks that are well established and already generating free cash flows today can be great opportunities to find defensive investments because there’s less uncertainty around their cash flow generating ability. You can find a list of such companies in our US Established, Profitable and Undervalued Discovery page.
What to watch
Events over the next days and weeks will likely move quickly and market reactions will likely be unpredictable and erratic. To understand how the situation may affect companies in your portfolio, keep an eye on your Dashboard for announcements, as well as any press releases directly from the company.
It is also a good idea to keep an eye on any further sanctions that get announced, as they will affect the supply and demand economics of various goods and services, which could affect the companies you own or are watching.
The next Federal Reserve meeting is coming up in mid-March (15-16th) and the expectations for rate hikes are likely to unfold, it just appears to be a matter of whether it’ll be a 0.25% hike or a 0.5% hike.
We’re past halfway in the US Earnings season and it is due to end around 9th March. If there are any companies in your Watchlist or Portfolio that are yet to report their latest results, keep an eye out for the results on your Dashboard!
Until next week,
Invest well,
Simply Wall St
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Simply Wall St analyst Michael Paige and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Michael Paige
Michael is the Content Lead at Simply Wall St. With over 9 years of experience analysing and researching companies, Michael contributes to the creation of our analytical content and has done so as an equity analyst since 2020. He previously worked as an Associate Adviser at Ord Minnett, helping build and manage clients' portfolios, and has been investing personally since 2015.
