5 Takeaways from the Inflation and Energy War Room

It’s been a volatile couple of months for the market. Inflation remains a concern—one that will shape Fed policy in the coming months.

But what about energy? While the negative crude oil prices of early 2020 are now a distant memory, the specter of inflation looms and leaves many questioning the effect it may have on the energy markets.

Add to the mix the developing situation with the Russian attack on Ukraine. Russia is the number two producer of oil globally—behind the U.S.—and between sanctions and stalled pipelines, we’re starting to see the conflict’s effects on global energy supply and pricing.

It was in this tumultuous reality that February’s War Room on inflation and energy was hosted. While the situation will remain a moving target in the coming weeks and months, some takeaways can guide investors through it all.

1. “Sell the rumor, buy the news” on Russia and Ukraine

With the developing conflict on Ukrainian soil, we saw the opposite of the old market truism, “Buy the rumor, sell the news.”

As Russian President Vladimir Putin began his attack on Ukraine on Thursday, February 24, markets initially faltered. By Friday, U.S. markets were charging upward.

Investors were skittish in the days and weeks leading up to the first attack. The constant drumbeat of threats from Putin put observers on edge. When the threats came to fruition, it seemed to—perhaps counterintuitively—tame some of the market volatility.

2. Bright skies are ahead for the companies that can weather inflation

With CPI at 7.5%, there’s no question that inflation remains a concern. But earnings are on the rise, too.

That’s because consumers are continuing to spend. After months cooped up in 2020—with nowhere to go and nothing to buy—it seems folks are ready to go out and splurge with some of the money they saved up during the early pandemic.

Retail sales were up nearly 4% in January, a rate that vastly outpaces the 0.65% increase in monthly CPI. That means companies are still coming out ahead, despite inflationary pressures.

The organizations that can push through this period of inflation will find themselves poised for growth.

3. Wars abroad don’t often impact U.S. markets

Russia’s attack on Ukraine certainly has devastating geopolitical and humanitarian implications. But when it comes to U.S. markets, the influence of overseas wars has historically been minimal.

For example, the previous instance of Russian aggression against Ukraine—the annexation of Crimea in 2014—did not have an impact on markets here.

4. The Fed cannot fix secular inflation

When it comes to taming high inflation rates, the Fed’s toolbox is limited. While it can slow quantitative easing, reduce its balance sheet, and hike rates, this only addresses the demand side.

However, much of the inflation we’re currently seeing is on the supply side. The costs of food, energy, vehicles, and shelter are not something the Fed can directly address or adjust.

Therefore, we may continue to see inflation rise even if the Fed takes a hawkish approach.

5. The good, baseline, and ugly

So, where does this all leave our portfolios?

While it’s not possible to foretell exactly what the future holds, the Inflation + Energy scenario can help advisors see how this might play out and the impact it will have on clients’ investments.

• ​Best-case scenario: Earnings keep growing despite inflation. Consumers continue to tap into reserves they saved during the pandemic, and spending remains high even if inflation doesn’t slow down.
• ​Baseline scenario: The limitations of the Fed’s impact on secular inflation play out in the markets. Supply/demand remains off-kilter, and oil prices rise as a result.
• ​Ugly scenario: Wage increases take a greater toll on employers. During the pandemic, millions of Americans opted to retire early. With slowed immigration rates, there are fewer people to fill open positions. This puts pressure on employers to pay higher wages. As the cost of doing business continues to rise, a breaking point may eventually be reached.

If there’s one thing illustrated over the past week, it’s that scenarios can change quickly. That’s why HiddenLevers is constantly updating its online scenario library. Keep checking in for updates to the Inflation + Energy and Russia Invasion scenarios.