Wall Street closed the week on Friday with huge gains, even though market observers suggested that investors hadn't experienced the last of volatility that caused traders stomachburns during a week that was extremely volatile.
"In the short-term, volatility should to be expected," said Daniel Milan (Managing Partner at Cornerstone Financial Services). "The market is undergoing a reset, which is what we have been discussing with our clients since December."
Stocks continued to run on Friday, following Thursday's late-day rally. Two of the major indexes erased their losses for the week. This included a Thursday morning plunge so steep that it briefly put the Nasdaq, a tech-heavy, into bear-market territory. It was down 20% from its recent high.
The markets closed on the week, with all three close to their highest levels for the day. The benchmark Dow Jones achieved not only its highest trading day in 2022, but also its strongest day since November 2020. The Brent crude oil benchmark was at $98, but the going rate for one barrel hovered around $98, compared to the $106 intraday high it reached earlier in the week.
It was a remarkable turnaround. Stocks, especially those of debt-hungry, fast-growing companies, have struggled since the start of the year as traders weighed the implications of a Federal Reserve that is more hawkish raising interest rates faster to combat inflation.
"We need to remember that the market was not in a great place when we entered this. According to Liz Young, SoFi's chief investment officer, the market was already fragile in terms of investor sentiment. "There has been quite a bit more multiple contraction, particularly in tech names."
The first half of the shortened trading session (exchanges closed Monday for President's Day) was driven largely by the same dynamic as the previous several weeks: concern that rising inflation and rising interest rate could halt economic growth.
While inflation concerns were still present, market momentum was dominated by the threat of a greater, and more immediate, threat to geopolitical stability. After weeks of increasing tensions, Russian President Vladimir Putin launched an extensive-based invasion of neighboring Ukraine.
"This is a time when the anticipation of the event is worse than it actually is." Young stated that there was a lot fear about the invasion, but that fear was short-lived when President Biden declared Thursday that U.S. sanctions against Russia would not prevent it from exporting oil. Market observers suggested that Friday's rally could have been caused by reports that Russian officials were open to talks with their Ukranian counterparts.
Tim Courtney, chief executive officer of Exencial Wealth Advisors, stated that the interest rate story started to play more as time passed. "Today we are back to where were at the start of the week. Strangely, the market has decided to ignore the invasion risk after just one day.
Chris Zaccarelli is the chief investment officer of the Independent Advisor Alliance. He said that investors would likely refocus their collective attention to the interplay between inflation, interest rates in the coming weeks, particularly before a meeting with Federal Reserve officials on March 15. He stated that markets have been unable to see the bigger picture. "As bad as Ukraine is, I believe the Federal Reserve poses a greater threat to markets than the events in Eastern Europe."
Milan stated that this week's gyrations support the advice that long-term investors should keep the course, despite short-term shocks. "The bottom line is that earnings are still good and money supply is still good. He said that supply chains will undoubtedly correct themselves.
"If this geopolitical risk is gone, then inflation and interest rate will return, which we have a better understanding of from a data perspective."