The world watched in both terror and shock as Russia began its invasion of Ukraine in late February. From a humanitarian standpoint, millions of Ukrainians have fled to neighboring countries, and many civilians have died in the fighting . Many are grappling with the tragic consequences of this invasion and how it will impact their families, livelihoods, and futures.
In turn, global markets are reacting in different directions, with investors scrambling to keep up and discern what ramifications the situation will have. As the old adage goes, the stock market is driven by fear and greed, and we will see that continue to ring true this year.
That said, there are a few silver linings: the economy continues to recover from COVID-19, supply chains are improving, and the discussions about new energy sources have ramped up. And from a stock market perspective, March ended up better than expected despite everything going on. However, looming interest rate rises and inflation have thrown in some wild cards to the pile.
What could the second quarter look like for the stock market?
Stock Market Prediction #1: Uncertainty in Ukraine will play an impact
Russia and Ukraine are two of the world's largest exporters when it comes to wheat, vegetable oils, and other grains, per a recent Washington Post article. Given everything going on, there's no realistic timeline for when things will "normalize," leading many to fear the impact on food manufacturing costs.
In the same article, Katie Denis, VP of Communication and Research for the Consumer Brands Association, said wheat and corn, two primary components of the American diet, will be impacted at levels not seen since the start of the pandemic.
"We’re already seeing energy prices rise and commodities futures for wheat and corn spike. That’s going to prompt concern when costs to make and ship goods continue to set records and consumer demand continues to be above levels not seen since March 2020,” she said to the Washington Post.
The main reason we'll see a chain reaction economically is that the U.S. and other major countries' response to Russia has been economic sanctions on Russian goods, commodities, and financial institutions in an effort to deter Russian leader Vladimir Putin. As it stands today, the U.S. has not targeted Russia's energy sector with sanctions. As Daleep Singh, White House economic advisor, put it at a recent press briefing: "we're not going to do anything which causes an unintended disruption to the flow of energy, as the global economic recovery is still underway."
Russia currently clocks in as the world's third largest exporter of oil, and is also a major producer of natural gas. However, there's still been corporate and social backlash, such as BP withdrawing its $14 billion stake in Russia oil giant Rosneft.
Still, Brent Crude Oil has risen to $100 a barrel as of early April– something we haven't seen since 2014. For reference, the price was $65 as recently as this past December 2021.
This has already had a major impact at the gas pump, as gas prices hover around $4.11 on average,, and even upwards of $6.00 in Los Angeles. How will that affect something like energy based stocks?
Energy prices, and therefore many energy-related stocks, are rising due to a low supply and high demand. WTI Crude Oil, a benchmark for oil prices, sat at $99 a barrel as of April 4th.
Why is supply low? Aside from many Western nations severing their ties to Russian energy, there is also a lack of domestic oil being extracted here in the U.S. At the height of the pandemic, when far fewer people were traveling, oil prices plummeted and energy costs were extremely cheap. In response, energy companies weren't extracting more oil. Curiously, there doesn't seem to be a big push to reverse this trend.
As Paddy Hirsch of NPR put it, "with oil now brimming at a hundred bucks a barrel, you'd think these companies would be pumping like mad. And yet, they are not."
OPEC Plus, the international cartel for petroleum-exporting countries, has only pledged a modest increase in oil. Long story short, the big-time oil producers aren't exactly rapidly ramping up production, despite President Joe Biden ordering the largest ever release of the U.S. Oil Reserves. However, economists aren't sure how drastic of an impact this will make.
Oil prices dropped 13% last week, dropping gas prices a bit, but it's unclear how long Biden would seek to keep this pace of releasing the reserves.
As far as the conflict in Ukraine's impact on the stock market goes, we really can't gauge its full impact yet. Think of it like a rock hitting a glass window. At first you see a major dent, but slowly but surely more cracks begin to spider out from the original incident.
For instance, the SWIFT banking network is cutting off seven major Russian banks from its network. SWIFT, a Belgian messaging system, connects over 11,000 banking institutions. While this was intended to be a sanction from the international community against Russia, it should be noted that this could have a reciprocal effect on U.S. and other global banking systems as well.
George Washington University professor Scheherezade Rehamn outlined some of the "unintended consequences" on the global banking community:
"Commercial banks are going to get hurt from these sanctions because they are barred from doing business. So, yes, unintended consequences - slower growth, less business for U.S. banks and European banks, allowance of other systems to be put into place which are not entirely desirable, like the crypto market. And there are other consequences that we don't talk about very often," he said.
Stock Market Prediction #2: Prepare for Volatility
If March showed us anything, it's that volatility may be a consistent thread over the next few months. After two straight "down" months, March ended up with a nice bounce-back despite the aforementioned Ukraine crisis.
As the New York Times reported, "The S&P 500 rose 3.6 percent for the month, snapping back after stocks had plunged to start the year."
However, that momentum could be tapered by rising interest rates, thus potentially creating more ups and downs.
As we'll get to in the next section, the Fed is trying to combat inflation by raising interest rates nationally. This creates further economic uncertainty, as people generally tend to save more and spend less when rates rise. A recent article from JP Morgan Chase explained some of the implications of rising interest rates.
"The Fed wants to increase the cost of credit and make borrowing more expensive. This would discourage people from borrowing aggressively to pursue opportunities, such as buying a home."
But in the context of the stock market, there's not a black and white answer that says "rising interest rates will do…x." Predictively speaking, companies may be hesitant to take big risks because of the rising rates, and this could have a trickle down effect down to the company's shareholders.
In any case, be prepared for more wild swings in the market as opposed to the generally consistent performance of the stock market in 2021.
Stock Market Prediction #3: Inflation will continue to rise, impacting consumer decisions.
Inflation's been a hot topic among investors, with several Wall Street outlets like Goldman Sachs fearing the inflation rate could reach levels not seen since the 1980s. The current inflation rate reached 7.5% this past January, per the Consumer Price Index.
As a reminder, inflation is essentially the decreasing value of a dollar due to increasing prices (gas, groceries, goods, etc.) in the economy. We've seen this in areas like the housing and auto markets, as limited supply has led to astronomically high prices and peoples' dollars not stretching as far as they did just a few years ago.
Here's an example: In 1995, a gallon of milk (a grocery store staple) cost an average of $2.48. However, in 2021, the same product cost an average of $3.55. That may not seem like a huge increase, but percentage-wise that's a 43% hike for something of equal value.
There are a variety of reasons for inflation, such as supply chains still recovering from the pandemic and the Fed raising interest rates, but the core question people are asking is this:
How will inflation affect the stock market?
There isn't really a simple answer. There have been conflicting research studies done about inflation's impact on the stock market, with some finding that it adversely affects it, and others pointing out that the overall effect is marginal. That said, the answer lies more in the middle.
There may be some short term volatility and uncertainty due to a rise in borrowing costs, but many experts speculate that businesses will try to shoulder the load before the burden falls to stockholders.
In an interview with Money.com, Ross Mayfield, an investment strategy analyst at Baird, said that "generally, the stock market has performed quite well over the past 40 to 50 years during periods of higher inflation."
And per Fisher Investments, the "shock factor" of inflation may not play as big of an effect as one might expect:
"Are inflation and steep rate hikes great? No. But neither one is automatically bearish. They also aren’t catching anyone off guard. Surprises are what move markets most over time. At this point, what negative scenarios are out there that markets haven’t already sorted through?," they said in a recent editorial.
While it can't be said definitively if inflation will have an inherently positive or negative effect, it will certainly make the state of the stock market less clear. And as mentioned before, it could temper big ambitions by companies, which in turn affects profit and overall growth.
"Inflation complicates the current investing landscape. It erodes the value of money that’s not invested, while rising interest rates will decrease the value of existing bond allocations, and various stock market sectors have taken a beating this year," said Forbes' Anna-Louise Jackson.
Stock Market Prediction #4: Gold and crypto will be used as short term safety nets.
When panic hits, many people begin to stockpile and turn to more "reliable" sources. Think of a bear stocking up for winter hibernation. It knows that there will be a dry stretch without much sustenance, so it loads up in anticipation for what's to come.
For investors, gold is often that safety net or sustenance. Per CNBC, "Gold, often used as a safe-store of value during times of political and financial uncertainty, has risen about 6.5% in February, having soared to an 18-month high of $1,973.96 last week."
Why gold? Historically, it has been an asset that can retain or even increase in value despite chaos or uncertainty in the world. Gold is a tangible, precious metal and isn't valued based on the interest rate or fiscal policies of a government, unlike fiat (traditional) currency. Moreover, the fact that people pile their money into gold only drives up its value (due to rising demand).
These days, you don't have to be a miner with a pickax to acquire gold. There are gold ETFs (exchange traded funds), such as SPDR gold shares (GLD), currently up almost 6% this year. You can also either indirectly buy stock in gold mining companies and operations, or directly purchase certified gold bars, coins, and jewelry.
Though gold no longer backs the U.S. dollar, many still see it as a valuable way to diversify their portfolio (especially given the recent ups and downs) as something you can physically retain should banks or companies fail. Not everyone will see gold the same way, but keep an eye out for gold ETFs and purchases to rise this month.
Similarly to gold, people will also see cryptocurrency, which derives its value from supply and demand, as another safe haven. As of writing this, Bitcoin has jumped to $46,400.
Stock Market Prediction #5. Investors will flock to "stable," lower-risk investments
Given that we started this blog by talking about uncertainty, we should close it out by talking about the opposite. As uncertainty rises, many investors will flock to safer, more "stable" stocks. Obviously no stock is empirically safe. But what we mean by stable is low-volatility stocks with historically positive returns and reputations.
What are some of these types of lower-risk investments? For a deeper dive, check out our blog on 4 Reliable Short Term Investments. However, as a brief overview, there are other asset classes besides stocks that fall under this category of being lower risk and less volatile.
For instance, investment vehicles such as CDs (Certificates of Deposit), Treasury Bills (T-Bills), and Bonds, will likely be highly considered by investors as they seek to diversify.
It's important to note that every investor's goals and risk tolerance varies. Someone who's a more conservative investor will look to minimize risks, particularly during periods of volatility and increased global uncertainty. A more aggressive investor with a greater time horizon (such as a young millennial) may take more risks as they theoretically have more time to recover than someone who's at the tail end of their career or investment journey.