(Bloomberg) — When it comes to styles of governing, the list of differences between Joe Biden and Donald Trump is — needless to say — quite a long one. Yet for operators in financial markets, the most important contrast is that communications from the sitting president rarely triggered sudden swings in asset prices the way his predecessor’s did.
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Or at least that used to be the case. This week marked a shift in the calculus, as the Biden administration’s aggressive rhetoric aimed at preventing a Russian invasion of Ukraine became the focal point of markets. It’s coming at an inconvenient moment for traders already grappling with tectonic shifts in global monetary policy as central bankers throw cold water on red-hot inflation readings.
While discussions of the effectiveness of Biden’s diplomacy are best left to the political-science experts, investors now find they have to perform the same type of risky, ad-hoc analysis they did when Trump was tweeting up a storm during the trade war with China: Trying to separate what’s bluff and bluster from a potential historic shift in geopolitical relationships. Complicating matters is the fact that Russian President Vladimir Putin, the man on the other side of the (very long) table, is a bluff-and-bluster Hall of Famer.
“Biden’s running commentary on the Ukraine situation has been volatility inducing, especially because it’s not what markets want to hear,” said Steve Sosnick, chief strategist at Interactive Brokers, referring to remarks by the president suggesting that a conflict could be imminent. “His messaging during his term so far has been less than stellar, but the volatility that we’re seeing — and that I think we’ll continue to see — is largely not of his own making.”
As U.S. investors held their breath heading into a long holiday weekend that may or may not feature a historic military assault, the numbers going into Wall Street’s weekly score books reflected the tensions.
The market’s best guess at what to expect for future stock-market swings, the Cboe Volatility Index, edged higher for a second straight week to about 28 — maintaining an elevated reading compared with the VIX’s level of 17.22, where it ended 2021. The S&P 500 lost 1.6% on the week, falling below its highly scrutinized 200-day trend line.
For Kim Forrest, founder and chief investment officer at Bokeh Capital Partners, the selling of equities appeared to be mostly driven by individual amateur investors, a group whose influence on market prices has grown significantly in the past two years.
“I think that the news around the Ukraine conflict has driven some retail investors to sell out of nervousness,” she said.
The week bolstered the appeal of gold as a haven from both geopolitical chaos and alarmingly high inflation, with the precious metal climbing for a third straight week to almost $1,900 an ounce.
And all eyes were glued to the oil price charts, as the Ukraine-Russia tensions raised the specter of potential disruptions to the global flow of crude. The signals there were mixed: While U.S. benchmark West Texas Intermediate futures managed to post the first weekly decline in two months, prices for cargoes bought and sold in the North Sea known as Dated Brent topped $100 a barrel for the first time since 2014.
The oil market is where investors’ geopolitical and inflation nightmares meet, since Russian-induced spikes in crude prices could further exacerbate cost pressures that threaten both corporate profit margins and consumer confidence alike. There was little this week to assuage those inflation worries. The U.S. producer price index for January, a measure of wholesale inflation reported on Feb. 15, came in at 9.7% on a year-over-year basis.
Readings like that fuel speculation that the geopolitcal tension will not be enough to cause a pivot from Federal Reserve policy makers, who are widely expected to embark on a series of interest-rate increases starting next month. More European Central Bank officials also conceded that interest rates will likely need to rise later this year.
Futures traders at the end of the week were pricing in the equivalent of six quarter-point rate hikes from the Fed this year, little changed from last week’s view. The situation between Russia and Ukraine would have to get much worse — and threaten much more harm to the economic outlook — to change that.
“Investors are paying a lot of attention to what’s going on in Washington right now,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research. “I don’t think anyone expects any action on the Fed’s part until March 16, so in the interim something else will fill that void and this is probably it.”
Still, investors can take comfort in one fact: Periods when the consensus seems to expect the worst have historically tended to be great opportunities to buy stocks.
The Investors Intelligence’s survey, which examines more than a hundred newsletters to assess each author’s view on the market, showed that the ratio of those in the bullish relative to bearish camps stands at 1.2, which is in the third-lowest decile of historical observations. Prior instances when the reading sat in that bucket have preceded an average 8.2% rally in the S&P 500 in the next six months, an advance much bigger than the average performance overall, data compiled by Strategas Research Partners show.
“We realize there’s no shortage of concerns out there and you can take your pick as to which one is the biggest problem,” strategists at Bespoke Investment Group said in a note to clients. “But one has to ask whether these levels of pessimism are starting to get a bit extreme.”
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