February 24, 2022 – Global equity markets continue to be influenced by two primary macro factors of rising geopolitical risk and changing central bank policies. Investors have been trying to answer two key questions which are intertwined with each other. In the last 24 hours, Russia provided the markets certainty that it will annex the Ukraine with the largest military invasion since World War II. The second question is whether the Federal Reserve will embark on a tightening cycle that finds the proper balance between fighting inflation without pushing the US economy into a recession?
Today, investors are expecting the Fed to move slower where, according to the CME Group, the probability of a 50-75 bps rate hike during the March 16th FOMC meeting has declined from 34%, as of yesterday, to 9.5% today. As a result, the threat has diminished for higher rates negatively impacting long duration risk assets, such as technology stocks. Investors now expect the Fed to be more careful where elevated energy prices may dampen aggregate demand versus prior expectations. This perspective provides a rationale for some investors to own durable growing technology companies which have declined ~20% from recent highs (at the NASDAQ index level). Finally, students of market history are familiar with the market, on average, trading in positive territory one year after declines greater than 20%.
Clearly, these macro geopolitical and central bank developments are highly dynamic and material. The Fed will provide more certainty in 19 days during its next formal meeting. For global equity markets, the invasion may put margins under further pressure for certain sectors, assuming supply bottlenecks become more entrenched. For fixed income markets, a flight to safety suggests that the upward rate normalization, which was well under way in US Treasuries, may likely be on pause. The Investment Office will pay particular attention to a number of key macro variables as the crisis plays out, including the oil price. The shape of the US Treasury curve and central bank communications will help inform investor views on growth expectations. While sanctions have been announced against individuals and financial institutions in Russia, the Investment Office expects that sanctions will be expanded significantly with the possible broadening of this physical escalation into cyberspace. In sum, it appears dovish Fed policy expectations outweigh the risks of a wider conflict in the minds of many market participants. Ultimately, any resolution to global tensions will also require China to clarify its intentions regarding Taiwan. Overall, the Investment Office is currently less concerned about recession risks, given the strength of the macro and bottom up fundamental backdrop. However, we also recognize that as certain questions are answered there are new questions that need to be asked and addressed, broadening the range of potential market outcomes in 2022.
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any Investment decisions. The information contained herein was carefully compiled from sources believed to be reliable, but Robertson Stephens cannot guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Past performance does not guarantee future results. Forward-looking performance targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2022 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere. A1234