Volatility is the Story of the Day

Geopolitical, financial, and economic uncertainties are compounding in a precarious display of ups and downs across nearly every asset class.

Key Takeaways:

  • Precious metals, stocks, and commodities are rising and falling rapidly as the market tries to digest the earth-shattering news popping up daily.
  • Oil prices reached a decade high this week, with some economists predicting an additional 50% rise.
  • Biden intends to utilize price controls to control domestic inflation. President Nixon tried this in the 1970s – the result was not pretty.
  • Volatility in Action

    Volatility is the story of the day, taking root in the form of geopolitical tension, market prices, and emotions. Unless things take a 180-degree turn, we are looking at the beginning of this volatility cycle rather than the end.

    Though volatility cycles are painful, prudent investors can not only survive but thrive with the help of two things: 1) a robust and resilient portfolio strategy and 2) an accurate understanding of history.

    Let’s take a look at volatility in action.

    The chart below shows the VIX, a popular measure of stock market volatility. A rising VIX index means the market is predicting unstable market conditions in the near term. High VIX readings typically correlate with stock market crashes.

    If we look at a long-term chart, we can see that the VIX rarely rises above 30. In fact, the VIX is currently sitting at the highest level since 2011 (if you exclude the COVID-19 crash).

    Stocks, Oil, and Gold

    Stocks have stopped their free-fall, but remain far from their peak. Lingering consumer pessimism, combined with tightening monetary policy, will make it difficult for stocks to rally back to all-time highs.

    U.S. oil futures have exploded to $111. When the COVID pandemic in early 2020, oil futures were trading in negative territory for the first time ever. Oil prices are now on a tear, reaching decade highs this week. Some economists expect oil to surpass $150/barrel as the Russian invasion crunches energy supply.

    At the very beginning of the Russian invasion, gold spiked to $1,974. It has now pulled back slightly, but remains above its key resistance zones. As inflationary pressures become more deeply rooted, so will gold’s bullish trend.

    The State of the Union

    Biden delivered his State of the Union address Tuesday night. His message benefitted from Americans’ unity against a common enemy: Russia.

    He mapped out plans to punish Russia, boost infrastructure spending, and fight inflation. Unfortunately, the first two priorities may run counter to the third. Western sanctions are successfully destroying the Russian economy, but the ripple effects will have an inflationary impact across the globe. As we saw in 2021, government spending also has an inflationary effect.

    Based on his State of the Union address, it sounds like President Biden intends to control inflation using price controls. He discussed capping the prices of prescription drugs, for example. Price controls may be effective if certain companies have a monopoly over certain industries, but broad price controls risk disrupting the free market and damaging supply chains.

    Do Price Controls Work?

    Price controls are not a new phenomenon in the United States. On August 15th, 1971, President Richard Nixon issued a 90-day freeze on wages and prices to fight inflation. This is also the day Nixon removed the U.S. dollar from the gold standard.

    Did these measures work? As you might guess, the answer is a resounding no.

    Nixon’s price controls forced inflation down for a few months, but ultimately triggered the most debilitating inflationary period in U.S. history. The U.S. dollar lost more than a third of its value during the 1970s.

    Of course, there are many differences between Nixon’s agenda and Biden’s. Modern economists argue about whether our current situation reflects 1970’s stagflation, but we are inclined to believe federal price controls will have similarly dangerous effects.

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    As always, thank you so much for reading – and happy investing!

    Additional Resources:

    Commodities Hit New Highs as Traders Shun Russian Purchases (Yahoo Finance)

    Xi unlikely to ditch his ‘best friend’ Putin despite Ukraine pressure (Financial Times)

    Wheat Soars to 14-Year High as Russia Invasion Chokes Trade (Yahoo Finance)

    Fed Chair Powell notes ‘highly uncertain’ Ukraine impact, but says rate hikes are still coming (CNBC)

    Rate-Hike Bets Are Unwinding and Taking Bond Yields With Them (Yahoo Finance)