Wall Street could face another rough week as tensions over Ukraine between Russia and the West threaten to drive oil prices up to triple digits, and push consumers to the brink of inflation, already at their highest point in 40 years.
Maybe not. Eric Freedman is chief investment officer at U.S. Bank Wealth Management. “There are no predictable outcomes here.” Markets don’t have an edge when there is conflict of this magnitude.
Tuesday saw all three major stock indices fall as Germany stopped certification of Nord Stream 2 and Western countries, including the United States, announced sanctions towards Russia.
The Dow Jones Industrial Average ended the day with a loss of 482 points. The S&P 500 dropped 44 points, putting the index down more that 10 percent since January and officially in correction territory.
Oil prices continued to rise. Brent crude oil, a benchmark oil-price indicator, was within 50 cents of $100 per barrel before falling modestly. Experts now believe that crude oil could easily surpass $100 per barrel with $125 within reach.
Patrick DeHaan from GasBuddy.com, head of petroleum analysis, said that this “certainly supports the case that $4 per gallon gas is only an issue of time.” GasBuddy data as of Monday showed a national average price of $3.52 per gallon. This is up approximately 21 cents compared to a month ago, and almost 90 cents compared to the previous year.
Russia, which supplies roughly 10% of the world’s oil supply, is the biggest threat to energy prices. It will respond to any sanctions by limiting its exports. This could cause a wild ride for markets and consumers, as well as the oil sector.
Higher prices at the pump will not be the end of the matter. Higher oil prices can cause increases in almost every product category, including food and plastics. It also affects every step of the supply chain from manufacturing and packaging goods to shipping them to homes or stores.
Jeffrey Schott is a senior fellow at The Peterson Institute for International Economics. He said, “This will contribute further to inflationary pressure.” As rising prices weigh on consumers, the possibility of inflation running hotter and more prolonged is real. According to Tuesday’s data from The Conference Board, consumer confidence fell to a five month low in February.
Many consumers are able to absorb higher prices because of their higher personal savings. But as inflation begins to surpass wage gains, Americans will be losing ground.
Tom Martin, Senior Portfolio Manager at Globalt Investments, stated that while it hasn’t had a negative impact on consumer spending, the pace it continues to run on a daily basis, it certainly crimps. Their margin of error is shrinking.”
Wall Street is concerned about the loss of this buffer, which increases market volatility. It suggests that policymakers may raise interest rates faster and higher than they expected. Freedman stated that the Federal Reserve’s shift from an excessive amount of flexibility to a more restrictive set of possible monetary policies is the biggest market overhang currently.
FolioBeyond’s chief strategist and portfolio manager Dean Smith stated that “we are on a long-term trajectory to higher rates.” Consumption is the largest driver of the nation’s economy. Smith stated that this will impact consumer spending.
