Chrysostomos (Makis) Bollas: 2023 bumpy ride or positive surprises?
Russia’s invasion of Ukraine has passed the one-year mark. Russian forces invaded Ukraine after Russian President Vladimir Putin authorised a ‘special military operation’ against the country on February 24, 2022. When one of the major world powers launches an offensive against a recognised country, the impact on financial markets is obvious. However, over the past 12 months, the impact of the invasion on the U.S. stock market has been largely muted, with price fluctuations occurring on only a few occasions.
The S&P 500 Index closed at 4225.5 on February 23, 2022, 4288.7 on February 24, and 4384.65 on February 25, 2022, with no immediate negative impact as it slowly became clear that the U.S. would impose further sanctions on Russia. Markets realised that the invasion might not have a long-term impact. Today, one year after the start of the Ukrainian-Russian war, the S&P 500 is hovering around the 4000 point mark, down about 7%.
The reasons for the S&P 500s decline over the past year have more to do with inflation and interest rates. The nearly 13% decline in the Nasdaq 100, the technology-heavy index, is largely due to the scenario of rising interest rates.
However, one aspect of the Russia-Ukraine conflict stands out for the markets. While inflation was undoubtedly knocking on the door, the invasion rocked the global supply chain and may have accelerated the impact of inflation on the economy. The rest is history, as the U.S. Federal Reserve saw fit to raise interest rates, causing volatility in the equity markets. As the US CPI index rose to 9.1%, pushing inflation to its highest level in several decades, the Fed began its unprecedented tightening measures to curb inflation.
For U.S. companies, the Russia-Ukraine crisis posed a moderate earnings risk. U.S. companies reportedly have limited direct exposure to Russia (about 0.6% for the Russell 1000 Index) and Ukraine (0.1%). The energy crisis in Europe and other parts of the world was a given, but the impact appeared to be less than previously expected.
As of February 2023, inflation is at 6.4% (January data CPI ), and the Fed has raised interest rates by 450 basis points, but the 2% inflation target is still elusive.
There are reasons for optimism. January gave already a good year kick-off, but a bumpy ride is still likely. Although 2023 starts with so much doom and gloom, it is equally likely that there will be positive surprises.