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US Economy and the Russian Invasion of Ukraine – The Clouds are Rolling In

US Economy and the Russian Invasion of Ukraine – The Clouds are Rolling In

February 28, 2022

It’s been a while since I messaged clients with market updates and information regarding Capstone’s asset management strategies.  I’m overdue, so let’s dig in. 

The first two months of 2022 have really made a dent in economic activity and the stock market at large.  The S&P 500 Index, after a heroic run over multiple years has retreated almost 11.5%  so far this year.  The tech-heavy NASDAQ market index has been dismal – shedding around 17% year-to-date while the price-weighted Dow Jones Industrial Average has lost close to 10.25%.  (All rate of return information provided by

As the title of this post suggests, there are many headwinds that should raise investors’ concerns...Let’s go back to my post near the end of 2018 and recall what I wrote to readers regarding the economy, the markets, and the possibility of recession. (Follow the link to read the full post: 2018 Market Recap. And A Little Perspective). The S&P 500 lost 6.24% in 2018 (according to, marking its first relative large loss in years and all the headlines were flush with financial broadcasters drawing comparisons of 2018 to the 2008-2009 Financial Crisis and calling for another recession to hit the US Economy.  Frankly, I had disagreed with that consensus view back then. 

 I said in that post that the conditions that must exist in our economy that could push us into a recession were the following:

  • Increasing interest rates and inflationary pressure
  • A commodity price spike
  • A “bubbly” stock market

At the end of 2018, none of these conditions existed, and my inclination that we would avoid recession was not only correct, but the economy continued to show strong growth along with the stock market.  But, how about today – are those conditions in place?  You bet they are!  The Federal Reserve, in an effort to fight inflation rates that we haven’t seen in more than 40 years, is now gearing up for an interest rate hiking cycle where some analysts are expecting anywhere from 5 to 9 rate hikes this year alone.  The price of oil is through the roof due to massive cuts in domestic supply and increased regulation of drillers and gas & oil conglomerates, which has led to huge price spikes at the pump and, in some areas around the country, families are now paying double and even triple to heat their homes. 

Inflation and skyrocketing energy costs, if not mitigated properly, can be economy killers and are “hidden taxes” that can be a knock-out blow to many, if not most, consumers.  Couple that with increased interest rates that are implemented to actually reduce consumer spending and investment, along with a bubbly stock market, and we do have a recipe that can spell some trouble in our economy.  But, will we really go into some type of major recession this year?  Are we currently in some kind of financial crisis?  At Capstone, we feel that, while the risk of recession is certainly heightened, there is a possibility that we can dodge that bullet if the Federal Reserve plays their cards right.  Now, historically, the Fed’s track record of “soft landings” in the economy when raising rates to prevent overheating and inflation pressure is not so great.  That said, there are many who believe that Jerome Powell, The Fed Chair, and his colleagues, have a decent chance of landing gently because they’ve been preannouncing to the markets their next moves and setting an expectation that stocks can digest in order to revalue the markets in a relatively short period of time.  Nonetheless, if The Fed stays true to its historical form and we get a hard landing, we still feel that a resulting recession would be more mild – to say the least –  than what we saw in 2008 – 2009. 

With The Fed raising interest rates, corporate earnings stand to take a hit.  In 2020 and 2021, a majority of  corporations’ bottom lines were beating estimates by 20-25%, many companies were raising future guidance, and their outlook was very rosy.  That trend seems to be changing, though as fourth quarter earnings reports have been slowing down with the average beat of estimates now only at 5%, and guidance seems more tepid going forward (Source: CNBC.COM) as companies brace for lower bottom lines due to increased interest expenses and a weaker consumerTime will tell as we follow The Fed’s action for the rest of this year, and we will likely see the beginning of their interest rate hiking cycle starting next month in their March meeting.   

There are also other “wild cards” to be concerned about.  The first is our supply chain and all of the problems it’s faced with right now.  Most investors will admit that our supply chain is a complete mess, taking a major toll on corporate inventories, and adding upward pressure to prices of goods and services.  Lack of logistics, transportation, and truckers in our country is lending to supply chain complications that we really haven’t seen before.  On top of that, and most definitely even more concerning, is the increasing level of crime in many major cities across the United States.  In these cities, murder rates have increased significantly, as have car-jackings and, maybe most prevalent, are the so-called “smash and grab” robberies.  According to the National Retail Federation (NRF), to say that smash-and-grab robberies are brazen is a gross understatement.  Up to 80 or more people at one single time have been seen participating in these crimes, making stores of any size very easy targets.  Depending on the retailer, thieves can steal tens of thousands of dollars of merchandise and simply walk out of the store without fear of any legal action or being arrested because of recent changes to certain laws and reduced police enforcement in so many cities in our country.  In a recent survey, the NRF says the average dollar loss per robbery incident now exceeds $7,500 (from 2020) up from $820 in 2019.  In addition, because of our supply chain glut, retailers and small business owners are suffering from vast inventory shortages.  These crimes are especially devastating, according to the NRF, because many businesses with very limited inventory are now losing normal customer traffic because of safety concerns, and also have minimal insurance coverage for losses incurred due to theft. 

The backlog of our supply chain and increase in theft-related crime, are triggering very serious logistical and humanitarian concerns – but also, are causing great economic harm to many businesses and consumers across the nation.        

So now we come to the elephant in the room:  Russia’s invasion of Ukraine…As I was writing this post late last week, I was pulled away for a quick moment after noticing that the Russian President, Vladimir Putin, was done marking time and holding back his troops at the border of Ukraine and he gave “the order”.  The next thing I see are headlines of military strikes coming from all angles at Ukrainian targets and a full-scale war was underway.  On Friday morning, as Russian air strikes and ground troops made their way throughout the country, US equity futures plummeted and stocks dropped precipitously as soon as the markets opened.  As the situation in Ukraine remained very fluid and the headlines were rolling in at break-neck speed, the Dow Jones Industrial Average fell over 800 points and the rest of the markets were down over 2.5%.  After the Russian President’s military made its way through Ukraine, seizing and capturing several military targets (including the airport and the Chernobyl nuclear plant), it seemed as though a new “iron curtain” was falling in literally every region of that country. 

In an address to the media, President Joe Biden spoke and stated that the US and its allies will continue to increase economic sanctions against Russia that would be on “sliding scale” and increase as Putin’s invasion escalates.  After he spoke, it was noticeable that the markets had cut their losses for the day and the S&P 500 even broke into the green…Did the sanctions mentioned by the US President cause some relief on Wall Street or was is it something else?  Well, it was widely expected that the sanctions against Putin were going to include the  “nuclear option” penalty by kicking that country out of “SWIFT” or “The Society for Worldwide Interbank Financial Telecommunications”, a global cooperative formed in the early 70’s.  SWIFT acts as a secure messaging system that is linked up with 11,000 financial institutions in over 200 countries and alerts banks when financial transactions are set to occur.  As one political analyst put it, “imagine Venmo meeting up with email – that’s SWIFT”…Kicking Russia out of SWIFT would be most punitive to that country as it would cut Russia off from most international financial transactions, resulting in the loss of more than 40% of its total revenues that are generated from oil and gas production.  As of that address, Biden and our allies had not imposed this option and when markets realized that it was off the table, they crept into positive territory after a huge rally from the depths of a viscous sell-off earlier that morning.   

Now, five days later into this brutal invasion, in what seemed to be a begging appeal from the 44-year old Ukrainian President, Volodymyr Zelenskyy, was insisting that sanctions against Russia by the West be enacted much faster and with more severe impact in order to box out and paralyze that country from continuing economic activities and trade around the globe.  After Mr. Zelenskyy’s plea, the Wall Street Journal said in a recent article that Ukraine is an “inspiration to a ‘COMPLACENT' West” and James Clapper, a former Director of National Intelligence, reiterated on CNN the Ukrainian President’s claim that Russia’s actions now show signs of ‘Genocide’ and that Putin’s mental state is firmly in question after making threats of nuclear warfare. 

According to CNN’s Stephen Collinson, the Ukrainian leader's defiance of Russia’s aggression and his courage has “inspired and shamed the United States and the European Union into going further -- and far faster -- in turning Russia into a pariah state”…Now the United States and other NATO countries including Germany, have promised to supply Ukraine with weapons, ammunition, and other provisions as they appear to be increasingly drawn into a possible proxy war with Russia over Ukraine, even though it is not a member of NATO.  After the West’s change of heart, Washington and our allies are now also pushing personal sanctions on President Putin directly and, in fact, have now kicked key Russian banks out of the SWIFT global financial network but not without certain exceptions that allow Russia to continue conducting business within their oil and gas production dealings, which many have criticized because that won’t take Russia out at its knees economically.    

In further support of US sanctions, Germany, under new Chancellor Olaf Scholz, has pledged to exceed NATO defense spending level guidelines to assist Ukraine and is also sending weapons to the war zone to arm Ukrainians that are fighting Russian soldiers.  Germany also halted the flow of energy through the Nord Stream II pipeline which Russia uses to transport vital supplies of natural gas to much of Western Europe.  Additionally, the Hungarian Prime Minister Viktor Orban, who at one point was a Putin protege, has turned his back on the Russian Dictator and sided with the European Union against the Russians.  In a similar move, the Turkish Autocrat and President Recep Tayyip Erdogan, who has also been friendly with Vladimir Putin, has invoked a 1930s convention that could disrupt Russia's Black Sea naval operations. 

As the US and its allies turn up the heat on Putin, Russian barbarity in Ukraine continues as the country’s second largest city, Kharkiv, over the weekend, has endured some of the most intense rocket bombings since the invasion began.  Despite continued devastation within all of war-torn Ukraine, Putin’s rhetoric to NATO has evolved from a focus on seizing the region, to exploring nuclear warfare preparation that would be used against any country coming to Ukraine’s side.  Over the weekend Florida Senator Marco Rubio, who is a member of the Senate Intelligence Committee which makes him privy to briefings from American spies, posted on Twitter on Saturday the following: “I wish I could share more, but for now I can say it’s pretty obvious to many that something is off with #Putin”. 

Mr. Rubio continued by saying: “He [Putin] has always been a killer, but his problem now is different and significant. It would be a mistake to assume this Putin would react the same way he would have 5 years ago,”.  (See the full post here: Marco Rubio). The key take-away from the former US Presidential Candidate’s statements is that Vladimir Putin is appearing to become erratic and somewhat delusional as he is putting the world on edge regarding his access to “the button” that controls Russia’s “heightened” nuclear-arms power capabilities. 

At Capstone, we have been taking lots of questions from clients regarding the conflict between these two countries, and, while no one actually can predict what the outcome will look like, it’s important to be mindful of the basics. Global markets do not like wars and with geopolitical tensions so highly escalated, we’re seeing heavy declines – not only here in the US, but around the Globe (Russia’s stock market is down over 20% in a matter of days and over 50% since its most recent high (Source: Yahoo Finance).  The simple notion of any war, generally speaking, stokes uncertainties that cannot be easily quantified, can cause market disruptions of significant scope, and will undoubtedly add to the volatility in major world markets.    

So, what should we expect from here?  Well, most importantly, it’s crucial to recognize that recessions, inflation, market volatility, and even wars are, for better or worse, a part of life that we live and part of investing.  At Capstone, we don’t feel that an “all clear” signal in the markets is anywhere nearby, and while our hearts go out to those in harm’s way in Ukraine, we must also recognize other headwinds that we’re facing in the markets – Let’s not forget that The Fed is now very hawkish and planning on several rate hikes to battle our inflation problems here in the States and that, well before Putin made his move into Ukraine, we had issues here to be dealt with which I’ve described in this post.  Another notable problem for many investors is inexperience in managing their investments in bad times.  Now, maybe the markets won’t repeat what we have been through in the past (like what we saw in 2008-2009), but there are risks now that many investors may have never seen or dealt with before. The seemingly perpetual and uninterrupted growth in capital markets which has been bolstered by The Fed’s “floor” beneath the markets for over a decade now seem to be subsiding.  Since the arrival of quantitative easing (“QE”) and tranquil monetary policy, almost every single participant in the market has experienced incredible growth within their portfolios which has been due in large part to this action taken by Fed officials.  Take a look at the scope of the recovery after Covid-19 pandemic woes hit the world.  The S&P 500 declined by over 35% during the fastest drop in history only to rip back higher and hit new records as The Fed came to rescue.  Some reading this post may remember past messages where I explained how “complacency is not a strategy”, and at Capstone, we maintain a disciplined investment approach to ensure proper management of investment risk. (Follow the link to view the full post: Complacency Is Not A Strategy).  Now that The Fed is basically “in a box” and must raise rates and reduce quantitative relief for capital markets, how will investors, especially those with inexperience in managing through recessionary times or even in a bear market, make out?  Well, we believe that responsible investing is key, especially given the current landscape and all of its headwinds.  At Capstone, our advisors have the experience of managing money through the bad times and realize the importance of managing risk relative to negative influences that can challenge our economy and the markets. 

During times like these, it could be a great time to review portfolios and asset allocation strategies as the “wall of worry” continues to grow.  As always remember that we are investors for years, not days or weeks, and getting dependable advice is vital for long-term investment success.  For all Capstone clients reading this message, please, as usual, contact us with any questions or concerns that you may have.  For any readers of this post who are not yet clients of Capstone and are wondering if their portfolio is positioned appropriately, please feel free to contact us for a no-cost, no-obligation review of your investments and your financial plan.  The Capstone Advisors can be reached at (570) 587-7800 (office – direct) or 888-587-7526 (toll-free).    

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.