The risk of even higher inflation following the invasion of Ukraine is a ‘main concern’ for investors, says the head of global market strategy at Wells Fargo Investment Institute.
Investors should probably hold back from putting cash to work in the sinking stock market as geopolitical fears swirl around Russia’s full-scale invasion of Ukraine, according to Paul Christopher, head of global market strategy at Wells Fargo Investment Institute.
“Now is not a time to be buying the dip if you have cash,” said Christopher, in a phone interview Thursday. “And don’t sell.” he said. “It’s just a time to be patient” as there’s “too much uncertainty.”
U.S. stocks were falling Thursday afternoon, with the Dow Jones Industrial Average DJIA, +0.28% showing a sharp decline of 1.5%, according to FactSet data, at last check. The S&P 500 index SPX, +1.50% was down 0.5%, deepening its fall into correction territory.
While investors have been anxious about geopolitical tensions surrounding Ukraine, a full-scale invasion of the country by Russia was not priced into markets, according to Christopher. The stock market is on its “heels” ahead of anticipated rate hikes by the Federal Reserve, possibly as soon as next month, to tame high inflation that risks running hotter because of the invasion, he said.
While some investors may also be worrying about the potential for another “Cold War,” he said it’s not clear Russia would have the economic resources to expand its “imperial reach” and subjugate countries in a buffer zone around its borders like in the days of the former Soviet Union.
President Joe Biden on Thursday, while announcing new international sanctions against Russia, said it was still too early to tell if the conflict in Ukraine could be contained or if it would spill over into another Cold War.
“The more immediate worry for investors is what happens with inflation,” said Christopher, pointing to potential disruptions to the balance of supply and demand in energy, aluminum, nickel and fertilizer. That could push up prices. “With inflation running at 7.5% year-over-year, that spillover is the main concern for investors.”
Read: Ukraine invasion stokes stagflation worries because Russia is a ‘commodity superstore’
In Christopher’s view, rate hikes by the Fed aren’t “off the table” despite the turmoil created by Russian President Vladimir Putin’s decision to attack Ukraine on Thursday. While “a more moderate Fed going forward seems likely,” Christopher said that with the economy still growing “they could easily still do a quarter point in March and then just say ‘we’ll be data dependent’.”
In the meantime, Christopher said he continues to favor U.S. stocks over international equities, saying Russian-related tensions likely will weigh more heavily on European markets.
The STOXX Europe 600 SXXP, -3.28% index closed 3.3% lower Thursday, while London’s FTSE 100 index UKX, -3.88% dropped 3.9%, according to FactSet data.
“Despite its physical size, Russia has a relatively small economy and its largest trading partners are China and Europe,” according to a Wells Fargo Investment Research note Wednesday that was authored by Christopher. “There is little direct trade between Russia and the world outside of Europe and China, so both the sanctions on Russia and damage to sentiment likely will fall squarely on the European economies.”
Within equities, Christopher told MarketWatch he continues to like “quality” bets in areas including information technology and communication services, as well as “cyclicals” such as financials and industrials. He said he recommends underweighting defensive sectors including utilities and consumer staples.
“We’re not looking for a recession” in 2022, Christopher said. “We think you’ll have a chance to buy equities later this year.”