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02.24.22

February 2022 Economic Commentary

By Jesse Ellington, III

On the Razor's Edge

The markets are adjusting to the specter of war in Ukraine and higher interest rates. Under these circumstances equity PE ratios and prices should come down even in the face of rising earnings. Compounding these headwinds are valuations that have been sitting near historic highs—the perfect recipe for the correction that is underway. The question now is whether this evolves into a bear market, or can we rally from here?

Much of that is dependent on a quick resolution in the Ukraine. We sit on a razor’s edge trying to handicap whether Russia’s incursion spreads to other parts of Eastern Europe or how severe sanctions may tip their hand towards further aggression or cause a super spike in commodity prices. At this point in time, it is too early to tell and risk assets are under significant pressure. If we use recent history as a guide, in particular the takeovers of Georgia and Crimea, the crisis will dissipate quickly with a Russian takeover of the Ukraine. As odd as it may seem, this would de-escalate global contagion risk and markets would rally.

Further complicating matters is we are at the beginning of a rate increase cycle, however, the crisis in Europe may give the Fed pause even in the face of rising inflation. We have been in this position before. What is critical to determine is whether the Fed will be able to engineer a soft landing, successfully taming inflation while adjusting to the Ukraine crisis without tipping the economy into recession. Both the equity and bond markets are still saying “yes” at this point. Unfortunately, there still exits tails risk as we sit on this razors edge and so the expectation is for continued volatility in to the near future.

Our investment committee believes that periods like this create both opportunity and risk. We are focused on treading the fine line of staying fully invested while also taking advantage of any dislocation in markets caused by geopolitical instability and rising rates. The chart below is one we use at times like this to put things into perspective—the S&P 500 cumulative return since 1900. During that time there have been world wars and massive regional conflicts, deep recessions and market crashes, pandemics, hyperinflation, and the threat of nuclear annihilation, but the market has marched on. With that in mind we will once again use this period of volatility to our clients’ advantage.

Commentary S&P Chart

Source: JP Morgan Guide to Markets

Please call or email me with any questions or observations at jess.ellington@aubwm.com or 843-412-1420.

Disclosures:
Atlantic Union Bank Wealth Management is a division of Atlantic Union Bank that offers asset management, private banking, and trust and estate services. Securities are not insured by the FDIC or any other government agency, are not deposits or obligations of Atlantic Union Bank, are not guaranteed by Atlantic Union Bank or any of its affiliates, and are subject to risks, including the possible loss of principal. Deposit products are provided by Atlantic Union Bank, Member FDIC.

Past performance quoted is past performance and is not a guarantee of future results. Portfolio diversification does not guarantee investment returns and does not eliminate the risk of loss. The opinions and estimates put forth constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.


About the Author
Jesse Ellington, III
Jesse started out his career as an analyst perfecting the craft of digging into companies, moved to the investment management consulting business where understanding proper asset allocation was key, and spent 12 years running a hedge fund and honing his macro skills. He brings all that experience to Atlantic Union Bank Wealth Management in his role of Chief Investment Officer. 

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