• Russia was less than 0.5% of the total global stock-market and less than 4% of the total emerging market capitalization as of 12/31/21. This small weighting is one reason why it has been relatively easy for western countries to distance themselves financially from Russia over the past two weeks through a series of sanctions.
• Recent data shows that wage growth in the US has flattened out and that “real wages”, which take the effect of inflation into account, actually decreased by -2.8% in February. More worrisome is that this data came out before oil rose 20% over the past week due to the War in Ukraine. Clearly the risk of stagflation, or a slowdown in economic growth accompanied by inflation, is increasing.
• One narrative in the market right now is that companies have been raising there prices to keep up with their rising costs (ex: wages, cost of goods etc). Yet, data shows that last year both gross margins and EBIT margins of S&P500 companies rose to a record 35% and 16% respectively. This indicates that many companies may be taking advantage of this inflation narrative to boost profits.
• If western nations completely disassociate from Russian oil Russia could face the same fate that Iran did in 1978. At the time Iran was dealing with a revolution at home while the US government simultaneously froze the country’s assets. Iran’s oil output never recovered, averaging (over the past four decades) roughly half the output it had achieved in the mid-1970’s.