Rob Haworth, Senior Investment Strategist at U.S. Bank Wealth Management, discusses how Markets can navigate geopolitical conflict and whether the Fed will take an aggressive stance on inflation. 

Opening Bell

Markets Open Down 2% as Russia’s Invasion of Ukraine Weighs on Investors

for some early morning insight on how this activity is is trading out this morning, joined by rob Hayworth, senior investment strategist at U. S. Bank wealth management rob markets obviously in correction territory, the NASDAQ approaching essentially bear market territory. We haven't seen these levels for quite some time. You also got the to the 10 and the 30 Year Treasury yields those falling as much as 10 basis points. How are you approaching and navigating this geopolitical attention and the impact to kind of the broader markets and the global economy? Well, much like the market, I'd say we're all in reactionary mode because we don't really have an edge on what's next in Ukraine. Right. This is this is obviously a conflict driven by the Russian invasion. And and so we're not clear what's happening next. What we do think about is, well, what is the impact on underlying fundamentals in the market and the economy? And what we're trying to understand and think through is one, Does the rise in oil prices start to change the Federal Reserve's reaction function? Does it start to alter the behavior of consumers and profit margins for companies? Um, and then to how how far does this go, how much, how much risk really has to come off the table when it comes to global markets? And I think the key for us there is what is this due to european growth because right now they are the most impacted their the most impacted by the rising prices. They're the most impacted by a potential decline in Russian oil output and energy distribution into europe. So these are things I think the market is trying to price and factor in and to some extent just get out of the way while we while we wait for a more stable environment. And in this so much even bigger than oil. Right? And I think that's why we see kind of this broader pullback Russia produces, you know, 6% of the world's aluminum has 11% of global nickel supplies. It also produces palladium uranium. I think of, you know, the chip shortage potentially getting even worse by just some of the implications here. That's on top of, you know, grains obviously you mentioned oil, but you're looking at energy prices, potentially higher food prices, potentially higher the ripple effect into semiconductors, into the E. V. Space with all of that in context, is there a sector, is there a space where the the impact is more minimal? Is there any safe place in the market right now? Well, I mean, if I say if we mean mean rising rising stock prices, probably not yet, other than bonds. Right. And that's what we're seeing this morning, is the dollar is up? You're benefiting from owning bonds. I think um, some of where we're looking to see some, some benefit and maybe they they get helped as as we move through this risk off phase, energy and materials prices, energy and materials companies, they're certainly benefiting from what is still rising demand as we look at economic reopening and higher prices, which could incentivize some output. But um, but really they should continue, they should continue to benefit from these kind of sustained high prices. What I try and keep in mind is if I look back to before we saw this conflict or the start of this conflict, oil prices were still here in the us at around $85 a barrel, so clearly lots of room for profits when we think about energy companies and that was true for a number of the commodities you mentioned as well that their prices were already hi as we hope for improving output and demand. This is certainly a story of so many layers and I think that's what we're seeing and we're going to continue to see throughout the activity today, investors kind of rippling through those layers, so to speak here, the first layer being kind of the inflationary pressures, What does this mean for for so many, you know, different commodities. But then the second layer to your point a moment ago, is around the Fed activity. What does that do to the Feds expected rate hike in March? Does it require the Fed to get even more aggressive given that we're looking at kind of a slew of of added inflationary pressures at a time where we already have historic high inflation or is the volatility we're seeing in the market just too much for the Fed to then kind of throw up a 50 basis point hike In March. How you kind of sift through that and what's your kind of gauge at the moment on what the Fed could potentially do given what we're seeing happen in the market today. And certainly what has happened in the last 11 hours with the invasion of Russia and Ukraine. Right, And the markets have already been taking some expect, taking down the expectations of that 50 basis point hike of the potential for a 50 basis point hike in March. And taking down, I think we're seeing expectations are pricing out six rate hikes over the course of the year. I think the challenge with prices up on this kind of an exogenous event without activity driving it is the Federal Reserve is going to have to be more judicious in its movements and look harder at the data because ultimately, what does happen not right away, but eventually, as the Federal Reserve increases interest rates as they're trying to slow down, activity, slowed down investment, um, bring down, bring down prices and demand. And, and with, you know, kind of where prices are right now, um, You know, that may already be happy. You know, that could be happening as consumers and businesses are forced to pivot and change tax. That said at $100 a barrel, it's certainly a very high price for oil. It will change some consumer behavior, but we still have high savings rates at high savings and growing wages, which, which means the consumer has some room to absorb the current price increases. Maybe not all the price increases we're seeing, but so I think, I think, you know, kind of the way we're thinking about it is is, you know, the Fed's going to have to have to pay close attention. They're going to get a jobs report and a C. P. I. Reporter consumer price inflation report before they go into their meeting on March 15th and 16th. Um, and that will help them along along with what's happening with with prices and conflict that will help them make a decision in March as to how much do they change rates and what is their actual path of policy going ahead given that we still have kind of a healthy consumer right now. You know, the the scenarios and the picture that you're painting for me just kind of elevates the concern around stagflation. How does the Fed, if we're pricing out kind of a 50 basis point hike, if the federally does a quarter basis point, how does the Fed to truly tackle inflation, given we have a healthy consumer and all signs point to kind of continued inflationary pressures just amid kind of of the tension and supply chain disruptions with the situation in Russia and Ukraine? I mean, I I start to really worry and I don't know, panic a little bit about the idea of stagflation. Uh It's, well, I I think we're still getting reasonable growth right. I mean that's gonna be kind of the interesting or the challenging thing is as long as the consumer is healthy and can spend it can spend, we are looking at having both growth and inflation so less stagflation erI more reflationary, right, where you're getting both in concert? I think the key question is how far does the Federal Reserve have to go to battle inflation to bring growth, which would bring real growth down? Right, It would slow real growth. So I think there's a fairly long runway on on that path before we worry about, you know, kind of truly stagflation erI growth where you're seeing flat economic activity along with rising inflation. So we're a ways away from that and from my, from my perspective, even though we do think that kind of growth and inflation should slow over the course of the year, we're still frankly seeing, you know, growth rates and growth expectations. If we look at, You know, consensus estimates of 3-4% over the course of 2022, this could reduce some of that, but real growth still looks pretty solid for the rest of the year. This is certainly we've been talking about the Fed's decision as a fine, you know, threading a fine needle, the needle has got even finer, you know, with the latest developments over the last 24 hours. I want to point to the NASDAQ and get your thoughts there. As I mentioned, we're obviously looking like getting closer to to bear bear market territory. The NASDAQ down with 8.5% over the last four weeks, 19% year. Today, kind of almost hitting the 20% threshold that would get us since the bear market territory. Are there any opportunities, any growth opportunities you see, you know, for the text based for those investors that have time to kind of wait, um you know, to put their money in now and obviously it's gonna be some downside maybe in the short term, but but in the broader long term, it's certainly, you know, when we look at the longer term, right near term, the beneficiaries are more in the cyclical energy, financial sectors longer term, there is still opportunity and technology. These are these are companies that are providing innovations and and continue to maintain secular growth opportunities for productivity enhancements and other enhancements to the economy. So, so longer term patient investors can, can probably ride this out and look to what are going to be really growing markets in time. But it it is going to be a rougher patch, it seems like here in the near term and for the for the rest of this border and perhaps in the net. All right, thank you so much for your insight rob Hayworth senior investment strategist at U. S. Bank wealth management