The effects of Russia”™s war in Ukraine on the U.S. economy are generating a new level of concern among investors. But according to John Traynor, chief investment officer at Bridgeport-based People”™s United Advisors, the underlying strength of the economy can withstand the negative resonance coming from the conflict.
“The invasion has roiled energy markets, driven the near-term price of crude oil to levels not seen since 2008 and raised all the commodity prices, including wheat and aluminum, while compounding global supply chain concerns and threatening world peace,” said Traynor during the recent “Market Insights and Outlook” webinar sponsored by People”™s United Advisors. “All of these effects will almost certainly feed into higher inflation and make the job of central bankers trying to control inflation all the more difficult. Additionally, they will almost certainly reduce global economic growth and growth in Europe in particular.”
Yet Albert Brenner, director of investment and research at People”™s United Advisors, observed that despite “the bad news out of Eastern Europe, the news about the US economy is good. The U.S. has led the worldwide recovery from the 2020 Covid-19 recession. Total economic output has fully recovered from the pandemic recession and is at the highest level in history and back at the trendline that it was before the pandemic hit.
“The same is true of personal consumption, which accounts for nearly 70% of GDP,” Brenner continued. “Consumers are generally in very good shape with low debt and high savings levels, and are spending more than ever.”
Brenner also pointed to a strong job market with “low unemployment and ample job openings.” And while total employment is still below the pre-pandemic peak, he highlighted that productivity has not suffered and companies are figuring out how to meet demand with smaller workforces.
“Companies report that hiring and retaining staff are the biggest challenges they face now that labor force participation is picking up, albeit slowly, after falling dramatically in the early stages of the pandemic.”
Brenner also stressed that inflation, and not full employment, was now the principal concern of the Federal Reserve. With higher prices created by supply chain disruptions and spiking energy prices, inflation has proved to be anything but the so-called “transitory” state that the Fed initially predicted.
But while the U.S. economy was mostly healthy, Brenner cautioned that “the rest of the world lags behind the U.S. recovery. And prior to the Russian invasion, we were expecting a synchronized global expansion with the rest of the world catching up to the U.S.”
In the global picture, Traynor explained, the “regions of the world that are net energy consumers will suffer from higher energy prices.” But he predicted the U.S. will be in a better position as a net energy producer, a situation not found in markets such as Europe, Japan or China where the bulk of energy resources are almost entirely imported.
Looking ahead, Traynor noted that recent market declines were primarily driven by investor concerns on the impact of Federal Reserve policies rather than the Ukraine war.
“So far, the markets have acted predictably,” Traynor said about investor reaction to the Russian invasion. “Energy is off dramatically, which will act as a tax on consumers. Economists estimate that a one cent increase in the price of gasoline correlates to about a billion dollar increase over the course of the year for investors as all energy costs rise. In the last few months, consumers have suffered from a $100 billion tax increase.”
Traynor predicted the U.S. economy will be impacted by how the Federal Reserve begins to raise interest rates.
“The last 11 years, we”™ve essentially had a zero interest rate policy from the Fed,” he said. “We”™ve essentially had free money, especially when you take a look at the cost of money after inflation as the Fed transitions to a hopefully more normal interest rate policy.”
But Brenner circled back to Russia, detailing that the war is putting a new priority on U.S. energy policy.
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“It has reframed the issue surrounding fossil fuels and nuclear energy,” he said. “We know that the president”™s approval rating has been almost a mirror reflection of the Consumer Price Index and the cost of gas.”
Still, Traynor insisted that today”™s crises do not mean everyone will suffer financially.
“We just need to keep in mind that investors have made money in challenging times,” he said. “And they can do so today. But we need to keep a clear head.”
Traynor recommended that investors “avoid the headline obsession” to prevent being trapped in the paralysis created by constant negative news, to understand and stick to their risk tolerance, and not to “underestimate the resilience” of the U.S. economy.
“The job market is strong, the economy is strong, the consumer is in very good shape,” Traynor said. “It”™s healthy today and we believe we”™re positioned to cope with the challenges of tomorrow.”
