As the war in Ukraine continues into its 4th month, our latest market update details how this ongoing conflict is affecting international markets. We also explore why Britain is facing the worst rate of inflation in the G7 and how US GDP growth may be achieved in the US this year thanks to stronger household balance sheets and lower unemployment rates.
The war in Ukraine and the effects on globally traded food exports
As stated above, the war in Ukraine has entered its “most active phase” according to Ukraine’s defense ministry. Antonio Guterres, the UN Secretary-General, has warned of a coming global food crisis, due to Russia blocking Ukrainian ports. This is because Ukraine & Russia make up 12% of traded calories, including roughly 30% of globally traded wheat exports 1, 28% of barley 2, 15% of maize 3 & 70% of sunflower oil 4. In response, Mr Guterres has called for Ukraine’s grain supplies to be released from ports and for Russian food & fertiliser exports to be allowed to resume trading on world markets.
The rise of inflation in Britain compared to the US
Elsewhere, Britain’s inflation was 9% in April5, the worst rate of inflation in the G7. Andrew Bailey, the Bank of England governor said there is not much he could do about it, singling out rises in food prices as the cause. Energy is also a large part of the inflation increase. In comparison, the US saw 8.3% inflation6, over the same period, which declined from the peak in March.
According to the minutes from their recent meeting, Federal Open Market Committee (FOMC) members indicated that it would be necessary to continue raising rates both in June and July at 0.50% intervals 7. While the FOMC is expediting their policy to get to a neutral rate, it may require a more restrictive monetary policy stance depending on “the evolving economic outlook & risks”.
US GDP Growth is expected to rebound and advance this year
For the time being, officials expect US GDP growth to rebound in the second quarter and
“advance at a solid pace over the remainder of the year”. We are encouraged by the ability of households to weather the current inflationary storm given that household balance sheets are stronger today than pre-covid.
The CEO of Bank of America, Brian Moynihan, recently stated 8 that customers who had $1k to $2k bank balances before the pandemic, now have about $4k as of last month. Customers that had $2k to $5k in their bank accounts pre-covid now have around $13k as of April. Further strength in the US economy is also reflected by the unemployment rate remaining low at 3.6% 9 for the month of April with employers adding 428,000 jobs 10.
On Friday the 20th of May, the S&P 500 was briefly below the 20% threshold 11, from its January 3rd peak, which defines a bear market. Over the last century and a half, median bear markets have lasted 21 months and produced 30% drawdowns. Non-recession bear markets have tended to be shorter and shallower, lasting 4.2 months and producing 22% drawdowns. 12
A recession in the U.S., while a completely healthy and a normal part of the economic cycle, is far from a foregone conclusion. Since 1988, the S&P 500 has returned 10.6% 13 as an average annual return. While the average return beats inflation & tends to outperform other asset classes over the long run, it needs to be appreciated that emotional investor behavior does tend to make equities overshoot both on the upside and downside.
What to do next?
Whilst there are some concerning changes in global market data, it’s important to remember that investors historically can not time markets successfully and the best strategy is to not make any rash decisions and consider the long term outlook.
If you have any questions about this market update or want to find out more about Brite Advisors and how we can maximise your pension and investment assets, please get in touch with us.
1 https://www.nationalgeographic.com/environment/article/war-in-ukraine-could-plunge-world-into-food-shortages
2 https://www.fitchsolutions.com/food-drink/russia-ukraine-crisis-barley-supply-under-pressure-risks-global-beer-industry-08-03-2022
3 https://www.npr.org/sections/goatsandsoda/2022/03/06/1083769798/russias-war-on-ukraine-is-dire-for-world-hunger-but-there-are-solutions
4 https://economictimes.indiatimes.com/news/economy/agriculture/supply-disruption-by-russia-ukraine-conflict-could-shorten-supply-of-sunflower-oil/articleshow/90563288.cms?from=mdr
5https://www.cnbc.com/2022/05/18/uk-inflation-jumps-to-40-year-high-of-9percent-as-food-and-energy-prices-spiral.html
6https://www.theguardian.com/business/live/2022/may/11/german-price-increases-record-high-food-energy-rises-us-announce-inflation-rate-business-live
7https://www.cnbc.com/2022/05/25/fed-minutes-may-2022.html
8 https://cdn.ameriprisecontent.com/cds/alwp/marketperspectives/20220429-btb.pdf (Page 5)
9 https://www.reuters.com/world/us/us-job-growth-solid-march-unemployment-rate-falls-36-2022-04-01/
10 https://www.politico.com/news/2022/05/06/u-s-jobs-april-inflation-00030647#:~:text=America’s%20employers%20added%20428%2C000%20jobs,and%20much%20higher%20borrowing%20costs.
11 https://www.forbes.com/sites/sergeiklebnikov/2022/05/23/heres-how-long-it-takes-for-stocks-to-recover-from-bear-markets/?sh=3a8c22402565
12 Haver Analytics
13 https://www.barrons.com/articles/market-downturn-investing-best-quality-stocks-buy-now-51652458791
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