Strategic Petroleum Release, Strong Jobs, Fail To Ease the Markets
Last week, the International Energy Agency announced the release of 60 million barrels of oil from global stockpiles and the U.S. agreed to 30 million barrels of crude oil from the Strategic Petroleum Reserve to be sold on the market. Problem: The U.S. consumes about 20.5 million barrels of oil daily. In fact, history has shown that declines in oil inventory (i.e., SPR releases) have had little impact on oil prices. In fact, the price of oil is up 0.5% today and was higher by nearly $30/barrel last week. It would seem that the current crisis in Ukraine is causing inflationary pressures to heat up. Commodities across the board were higher by 12% on average last week.
Last week's stellar Jobs Report for February had little affect on markets. More than 670,000 jobs were added in February, which exceeded both the 400,000 expected by analysts and the 481,000 added in January. Yet, the crisis in Ukraine and the allowance for the Fed to hike rates in 9 days left markets under-whelmed. Yet, more negotiations resume today between Russia and Ukraine. News this morning leaked that the Russian delegation has offered a solutions to potentially cease military action immediately.
The current crisis forces us to examine previous crises to determine how this one might potentially play out. In 2018, we saw equities decline nearly 20% during the 4th quarter of that calendar year. Currently, we are 60 days into the market decline starting on January 4th. If we examine 2018 after 60 days of market losses, the returns are slightly different (-7.6% in '18 vs. -9.7% this year). However, the level of the Wealth Protection Signal was nearly identical (28.2 in '18 vs. 28.5 today). Equities continued to sell off in 2018 after 60 days, ultimately finishing down 19.7% by December 24th of 2018, only to make new highs by April 26th of 2019. The Signal hit a level of 41.5 before easing and never ultimately causing the indicator to trigger. Contrast that with the 2008 Financial Crisis. By this point, 60 days of losses, in 2018, the S&P 500 Index was down 7.1%, but the Wealth Protection Signal had already triggered twice and would ultimately trigger for the 3rd time just a few days later. The current crisis has yet to see the Signal trigger, so any cautionary moves should be considered in light of past crises.
While the situation in the Ukraine is fluid and things can change quickly, the positive news on the negotiations this morning show that a resolution may be closer than further away. If Russia is willing to offer a ceasefire and facilitate a civilian evacuation, that provides some evidence that what Russian wants is a resolution and not the complete destruction of Ukraine. To this point, Russian forces only occupy relatively small areas in northern Ukraine. For some perspective, to harken back to the days of WWII, within 6 months Hitler had conquered Belgium, Luxembourg, the Netherlands, and France. For those expecting a world war as a result of this crisis might be overestimating the situation at present. Again, things can change quickly, which is why we will let our Wealth Protection Signal guide actions versus making quick decisions in a volatile market.