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Weekly Market Pulse: Ukraine Isn’t The Problem

This is a syndicated repost published with the permission of Alhambra Investments. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

As I write this the S&P 500 futures are down over 80 points, apparently in response to some rather harsh comments from Vladimir Putin concerning Ukraine. Russia recognized the independence of Donetsk and Luhansk, two breakaway regions in eastern Ukraine that border Russia, and is apparently deploying troops in these regions. This is seen by the west as a precursor to a full scale Russian invasion of Ukraine. Given that Russia has been playing this game of cat and mouse in southern Ukraine for at least 20 years, I have my doubts but I suppose anything is possible. There is no doubt that anytime troops are deployed – and both Ukraine and Russia have had troops in these areas for a long time – there is the potential for an incident that leads to more than either side bargained for but absent that, I don’t see what Putin has to gain from a full scale war. Taking and holding Kiev would be a very expensive proposition – in terms of casualties and treasure – and ultimately I doubt he could pull it off. But for now, everyone is on tenterhooks waiting to see what Putin will do next.

I was asked by several people last week what I was doing with regard to Ukraine. I have to admit that I was more than a little baffled by this question. Is there something I’m supposed to be doing? What I wrote in that first paragraph is based on my own reading due to my personal interest in geopolitics. I find it interesting and read quite a lot on the topic. But I can’t predict what will happen there, what Putin will do and what the consequences would be. Neither, I might add, can anyone in the Biden administration or the Trump administration before them. I can’t even say, with any conviction, how the Biden administration or our allies will react to this latest provocation. I know the US threatened economic sanctions in response to a full invasion but whether this qualifies or what impact those sanctions would have on the global economy I can’t say. I am aware, obviously, that Russia supplies a lot of natural gas to Europe and in the event of US sanctions this could impact Europe. I also know that there are so many LNG ships in the Atlantic right now that lease rates have collapsed (actually turned negative a couple of weeks back) so Russian threats to cut off Europe’s gas may not be much of a threat.

The other big threat from a Russia/Ukraine war is, supposedly, a spike in crude oil prices. US sanctions would presumably include some ban on importing Russian oil but only about 11% of our energy imports come from Russia; 70% of Russia’s oil exports go to the Netherlands, Germany, Belarus and Poland. If we stop importing Russian oil and oil products, someone else will surely step in to buy those barrels. And that will free up supply from some other region for the US. Oil is a global market and our sanctions would probably have little impact. That doesn’t mean that crude oil prices won’t continue to rise but if they do, I don’t think Russia will be the cause.

Less than 1% of S&P 500 revenue comes from Ukraine/Russia so any direct impact on US companies – at least large US companies – is tiny. Higher oil prices could certainly impact the US and global economy but experience tells us that embargoes/sanctions are ineffective. Besides, high energy prices globally right now appear to have more to do with global environmental policies than anything going on with Ukraine. If high energy prices cause a recession in Europe or the US there will be plenty of blame to go around although I’m sure Russia will be offered up as a very convenient scapegoat.

The S&P 500 and the NASDAQ are down in February (3.5% and 5.9% respectively) and for most of that time Ukraine has dominated the geopolitical news but that doesn’t mean the two are related. If stocks were selling off because of Ukraine, shouldn’t European shares be taking the brunt of the selling? Surely Germany and the rest of Europe would be more directly affected by a Russian invasion of Ukraine than the US. And yet, European stocks have outperformed US stocks since the end of January and YTD. Emerging market stocks, which would be severely impacted by a global economic slowdown, have outperformed both Europe and the US.

There are plenty of reasons for US stocks to be selling off right now. Rising interest rates and the potential for a Fed policy error have been offered as reasons – excuses – for the selling but interest rates at current levels should not have much impact on valuations. Could the Fed hike rates so far they put us in a recession? Sure and that isn’t without precedent but if they do, I would expect the yield curve to invert first and while it has flattened quite a bit from its peak last year, it isn’t inverted. The volatility we’ve seen since the beginning of the year indicates that liquidity conditions have tightened somewhat but that is probably not a bad thing at this point. Volatility tends to reduce leverage in markets via Darwinian means, the weaker, more vulnerable players falling victim. The decimation of some of the former high flyers in the market is a healthy event; adding a dollop of sanity is not a bad thing and doesn’t necessarily bode ill for the market as a whole. Corrections like this reveal the weak links and allow you to upgrade your portfolio.

The real reason for the selling, in my opinion, is that, if next year’s estimates are to be believed, earnings growth peaked in the 4th quarter. The blended earnings growth rate for Q4 is around 30% for the S&P 500 based on what’s been reported so far; revenue growth clocked in around 15.5%. For full year 2021 earnings growth looks to be around 47%. The problem is that earnings and revenue estimates for Q1, Q2 and calendar year 2022 are well below that rate. Earnings growth estimates for Q1, Q2 and calendar year are 5.2%, 4.7% and 8.6% respectively. Revenue growth estimates are 10.3%, 8.6% and 8.1%. Those aren’t bad numbers but they are challenging for a market trading at 19 times those earnings estimates.

With valuations high the price for missing earnings estimates has been very high. Companies who have reported less than expected earnings have seen their stock prices fall precipitously, many times by 20% or more. I’ve been doing this a long time and I’ve never seen so many big moves based on earnings. According to Factset the stock price move (up) for an earnings beat is just 1/4 of the 5 year average while the move for a miss (down) is nearly a quarter more. There have also been 55 companies – so far – in the S&P 500 that have lowered their future guidance. If you own one of those you know the impact; if you don’t count your blessings. High valuations are an indication of elevated risk and the evidence of that is written all over this market.

One more interesting tidbit from earnings season; companies with greater than 50% of their revenue in the US saw average revenue growth of 13.2% while those with less than 50% of their revenue in the US saw revenue growth of 21.7%. I think that may explain why non-US shares are outperforming this year and may continue to do so. Because the US measures for containing COVID were less severe than the rest of the world, our economy recovered sooner. Now the rest of the world is finally coming fully out of their COVID protocols and allowing more economic activity. I think we may see some spike in services activity in the US post-omicron phase but I suspect it will pale in comparison to what the rest of the world enjoys.

One more clue that Ukraine isn’t the problem it is being made out to be is the trading of the US dollar. The dollar has barely budged during this “crisis” and gold is up but whether that is due to Ukraine or slightly weakening US economic data is a tossup:


Interest rates have pulled back some over the last two weeks but the trend is still up. With the dollar stable and rates rising around the world (it isn’t just a US phenomenon), the environment favors non-US stocks (slightly due to lower valuations) and general commodities.


Bonds rose modestly last week and commodities squeaked out a gain but otherwise it was red across the board. Emerging markets outperformed again last week and maintain their lead for the year, one of the few major assets up on the year.

Value continues to outperform growth and that is true outside the US as well as inside.


The only sector higher last week was consumer staples. Energy and financials remain the only sectors up on the year.



Ukraine is not a good reason to make a change to your portfolio. You can’t predict it and even if you knew what Putin was going to do you may not get the market reaction right. Geopolitics is interesting but it doesn’t generally have a long lasting impact on markets (except for big long term trends). The way to address geopolitics in your portfolio is through diversification. That’s why our portfolios always have a strategic allocation to gold and commodities. It’s one reason we always hold high quality bonds. I can’t predict when those assets will prove useful but history says they will. If you want to know more about our approach to investing, contact us by clicking here.

Joe Calhoun

P.S. I want to assure everyone that I am not excusing Russia’s or Putin’s behavior. I grew up in an era when the Russians were the bad guys and I rode submarines in the North Atlantic during the cold war. I once looked at the Russian coast through a periscope. I loathe the Russians and everything Putin represents. And I don’t trust them to stay out of the rest of Eastern Europe once they’re done with Ukraine. But that is a long way in the future and not something the market is concerned with right now.


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