Stock Market Volatility: Schwab’s Quick Take

U.S. and global stocks fell sharply Thursday amid fear of a potential Russian invasion of Ukraine and ongoing concern about inflation. The S&P 500 index closed down 2.1%, the Dow Jones Industrial Average fell by 1.8%, and the Nasdaq fell 2.9%.

U.S. producer prices rose faster than expected in January. The Producer Price Index jumped 9.7% year over year, exceeding the 9.1% consensus forecast. Coming on the heels of a bigger-than-expected rise in consumer prices in January, the gain underscored concern that the Federal Reserve may significantly and swiftly raise short-term interest rates to control inflation.

Investors sought safety in safe-haven sectors and asset classes. The traditionally defensive Consumer Staples sector gained 0.9%, while the 10-year Treasury bond yield fell to 1.97% as bond prices (which move inversely to yields) jumped. The Nasdaq 100—which is heavily weighted toward economically sensitive Information Technology stocks—lost 3%.

U.S. stocks: Inflation is an ongoing concern

  • Thursday’s selloff emphasized how worried investors are about inflation. Higher prices are hurting consumer confidence. A tight labor market, rising wages, and higher energy prices are viewed as having the potential to speed up the Fed’s timeline for tighter monetary policy.
  • Speculative stocks, which have seen considerable losses over the past year, were hit hardest. Companies with weak fundamentals—such as no earnings and weak free cash flow yield—were bought strongly throughout the pandemic, but the subsequent tightening of financial conditions has hurt their performance.

Global stocks: Markets are watching the Russia-Ukraine situation

  • Accusations of cease-fire violations in eastern Ukraine weighed on markets. However, it’s worth noting that since the 2015 cease-fire ended major combat following Russia’s annexation of Crimea in 2014, the Organization for Security and Cooperation in Europe (OSCE) has logged hundreds of cease-fire violations. They are not necessarily a prelude to invasion.
  • Geopolitical events involving Russia since the fall of the USSR have had little impact for globally diversified investors. The human costs of military action are unmeasurable. However, on the day Russia invaded Georgia in 2008 and Ukraine in 2014, U.S., developed- and emerging-market stock indices around the world dipped less than 2%. They rebounded at least partially during the following five days.
  • The potential for disruptions to energy flows could slow Europe’s economy. However, the rise in energy prices over the past year could already reflect some disruptions, and governments are capping prices for consumers to lessen the impact.
  • International stocks declined less than U.S. stocks on Thursday. Markets continued to pursue a theme driven primarily by rising interest rates: punishing stocks with expensive valuations while favoring cheaper stocks with more immediate cash flows, which are more prevalent in international markets than in the U.S.