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Stock market: Russia-Ukraine tensions 'not going to help' amid risk-off sentiment

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Barrett Asset Management CIO Amy Kong sits down with Yahoo Finance Live to talk about the stress tests that geopolitical conflicts such as Russia-Ukraine pose for markets, inflation in oil and energy prices, and the Fed's interest rate hike policies.

Video Transcript

BRIAN CHEUNG: Welcome back to Yahoo Finance Live. We just crossed the 12:00 PM hour here on the East Coast. You can see that markets across the board are red. The Dow down almost 400 points. That's still only about 1%, but notable after we got those news headlines earlier this morning, President Joe Biden signaling that the likelihood of a Russian attack on Ukraine is high. He made those remarks in passing on the White House lawn.

Again, that's squaring with some of the commentary that we had gotten earlier in the week that Russia was perhaps standing down on the troops that they had amassed on the Ukrainian border, although the United States and NATO officials saying they really haven't seen the physical proof of them actually doing so. S&P 500 down 1% and the NASDAQ down about 1.6% in a noisy day that also included a lot of earnings.

But we got a lot on dock for the hour, but let's get right into all the market action with Amy Kong, Barrett Asset Management chief investment officer, who is our first guest for the hour. Amy, thank you so much for hopping on the show this afternoon. You know, a lot of market ups and downs over the last few trading sessions, all appearing to be off of the whims of these new developments that we continue to get on the Russian-Ukraine front. How sensitive do you think investors are right now?

AMY KONG: Hi, Brian. Thanks for having me. You know, when you have a risk-off environment that we've been seeing all year, adding on Ukraine is certainly not going to help the situation. So I'm not surprised to see heightened sensitivity. In general, we have seen through time and through stock market history, that geopolitical events like Ukraine and others have stress test the market. And in general, when we look at how the markets react to such news, there's a general protocol that we see happening. And of course, initially, there's that shock, there's that panic.

And I think in due time, investors start to digest whether such an event will really impact the fundamentals of the market. And the answer is really over the long run, you start to see some of that anxiety dissipate, to a degree. And so right now, we're in that initial shock phase, if you would. And I do think that as the Ukraine situation unfolds, there could be some short-term reactions. For example, oil prices could move higher if sanctions were to be imposed.

At the same time, you might see investors seeking safety, whether it's towards the US dollar or perhaps towards US treasuries. And that's certainly important, especially as we're dealing with higher inflation. So energy prices moving higher certainly not going to help that. And then of course, as yields potentially could move lower because of that seeking safety aspect, the Fed's kind of caught in a tough spot in terms of trying to raise rates on the front end of the yield curve.

BRIAN CHEUNG: Well, and that's an interesting point that you bring up on bond yields because there's kind of this push and pull dynamic where investors are also looking at the Federal Reserve's eventual moves to actually shrink its balance sheet, which will have an effect, they hope, on raising rates on the longer end of the curve.

So but there's also that demand pressure on it if people are trying to run to safe haven assets that are US dollar denominated. So when you take a look at the 10-year of flirting, kind of hovering up and below the 200 basis point level, does that really tell you anything? Or is it too noisy to look at where bond yields are going and say, all right, you know what? We've got to go risk-on, risk-off.

AMY KONG: Yeah, it's a great question, Brian. And I think that tug and-- that push and pull, rather, to your point, is likely to happen, especially as geopolitical events continue to transpire. As I've mentioned before, I think the Fed is caught in a little bit of a tough spot because we all know that they need to raise rates. And moving back to that pre-pandemic level of 2%, 2 and 1/4% is necessary in our view because of so much liquidity in the system.

But the pace at which they get to it, whether it all happens this year or perhaps spanned over two years, that's, I think, the tricky part because as you're seeing the backend of that yield curve come under pressure, I think, again, the risk of creating an inverted yield curve is something to continue to watch. The spread between the two-year part of the yield curve versus the 10-year today, to your point, is only about 50 basis points. So it really only takes two rate hikes on the frontend to create a flat yield curve.

And again, if pressure is on the backend, you can risk creating an inverted yield curve, which can create more questions, rather than answers, in terms of creating all that anxiety around whether or not the US can be pushed back into a recession. So I certainly think it's a valid question. And it's, unfortunately, wait and see at this point in terms of how the situation unfolds.

BRIAN CHEUNG: Amy, broad picture question here, regardless of the specific headlines on Russia-Ukraine in the short-term and even Fed policy, just at least from the March meeting, do you reposition right now?

AMY KONG: For the moment, no. I think we continue to feel constructive on the equity markets despite the volatility relative to other asset classes, such as cash and bonds. Certainly, as we're looking under the hood within the stock markets, we're very, very keen on trying to find individual companies that can weather the storm. And when I say weather the storm, I'm talking about being able to really operate in a very high inflationary environment. We just are coming off the later innings, if you would, of this fourth quarter earnings season.

And while numbers looked pretty good when you looked at how they fared in the last quarter, I think companies are starting to express that expenses as a group is growing at a much faster clip. And lots of companies have expressed that input costs have just gotten to a point where, unfortunately, it impacted earnings. So I'm not for repositioning in a sense of creating a lot of major shifts in our asset allocation, but certainly when we think about the companies we own, pricing power and operating leverage is very critical at this stage.

BRIAN CHEUNG: Yeah, inflation remaining the big story there. Amy Kong, Barrett Asset Management chief investment officer, thanks for stopping by this afternoon.