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Russia, Ukraine and the US Economy                                                                                         Join our Monthly Newsletter            2Q 2022                                                                                             

Mark R. Hoffman

CEO, Principal

When it come to Russia’s invasion of Ukraine, it feels wrong to think about anything except the tragic loss of life and potential loss of democratic freedom for the Ukrainian people.  There are more important things in this world than the US economy.  Having said that, as fiduciaries we must consider the implications of the invasion on our economy and our investments.  The implications are complex and interrelated.  In an attempt to keep this concise, we will highlight four key issues impacting the US economy and investments. 

  1. Inflation.  Driven by supply chain disruptions and sanctions on Russia, US inflation has climbed to nearly 8% - its highest level in decades.  High inflation has hit nearly every product and service you can think of, but it has hit two areas especially hard: energy and food.  Oil prices are over $100/barrel and have been for over a week.  This has led to average gas prices in the US of $4.50/gallon (and climbing) with prices in some geographies like California at over $7.00/gallon.  Food price inflation in February also reached 7.9% (year-over-year).  Russia and Ukraine have historically been massive exporters of wheat, corn, barley and other grains.  Those global supplies are no longer available.  Russia has historically also been a huge exporter of fertilizer.  Fertilizer supply is now so scarce that prices are at all time highs and US farmers are planning for reduced crops in 2022.  They simply cannot get the required fertilizer for normal planting rates at any price.
  2. Faster Federal Reserve rate hikes.  Before the Russian invasion, the Federal Reserve was already planning on rate hikes to battle inflation starting this month.  Trying to raise interest rates without sending shock waves through the economy is hard enough without exogenous shocks.  Now the Fed’s problem is infinitely more challenging.  The latest indications are that the Fed now may raise interest rates 5-6 times this year.
  3. Slower economic growth. I’ve seen estimates that higher inflation will push disposable income in US households down 0.7%.  Sustained oil prices of over $100/barrel could cost the average household an additional $750/year in energy costs. When households are spending more on energy and food, they spend less on everything else.  This alone could slow GDP growth by close to ½ of one percent.  The higher interest rates stemming from the Fed’s actions will make borrowing more expensive everywhere.  Corporations that borrow (nearly all of them) will spend more on interest payments and have less in earnings.  Higher interest rates will eventually lead to higher mortgage and auto loan rates.  Even less disposable income for the US consumer.  Not a pretty picture for the overall economy.
  4. Stock market volatility. All of the points above lead to fear, uncertainty and doubt.  That can lead to loss of consumer confidence, which can drive a decrease in consumer spending.  We have already seen increased volatility and declines (year-to-date) in the stock market.  This erodes household wealth – 30% of which is comprised of investments in the market.  Which can lead to more headwinds for consumer confidence. 

So the challenges for the US economy are non-trivial.  [Side note: the challenges for European economies are even greater than our own.]  That is not to say that all is lost.  US corporation earnings are still expected to grow 5-6% year-over year.  The job market continues to improve.  Wage rates are on the rise (though not as fast as inflation).  There are reasons to be somewhat optimistic.  But the challenges are real and are unlikely to go away any time soon. 

In times like these, it is especially important to have a disciplined investment strategy that includes appropriate diversification.  If you have any questions or concerns about your portfolio, reach out to us.  We are here to help.

Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.