Welcome to this week’s Market Wrap. After a spell of downward pressure, equity markets have generally been much stronger in the UK, US, Europe and Australia this week. On a 1-year basis, European stocks have understandably struggled most, with the Ukraine/Russia war dominating the backdrop.

Index changes

Source: Stockopedia, London Stock Exchange

Whether these very recent signs of improvement will continue is far from clear. But if research by the indexing giant Vanguard is accurate, it may not take long as you might think for markets to regain some composure. Their analysis of nearly 25 geopolitical upheavals over the past 60 year shows that equity markets generally start to recover within months of a major event:

Source: Vanguard

Initial sell-offs - which can vary in length - are usually contained to within 5%. Six months later, markets are usually in recovery mode - and then well into double figures at the 12 month mark. But whether these trends repeat amid the current turmoil is far from clear…

What is true is that the huge geopolitical and economic waves caused by this conflict are still yet to play out. One immediate consequence seems sure to be higher inflation (for longer), and there was an interesting post by Ben Carlson this week on why a recession could be one of the only ways that high inflation will ultimately come down.

All eyes on oil

Oil prices continue to capture the headlines, but the recent surge has weakened this week - with WTI at around $103 /barrel:

Source: Trading Economics

With global supply issues under the microscope, US oil majors have been among the big momentum winners over the past month.And for investors, this presents an interesting question…

On one hand, oil supply constraints (and a rising oil price) caused by the Ukraine conflict arguably make oil stocks more attractive. Not only that, many many of these shares have been languishing in value territory for years. Given that we’re already seeing a rotation from growth to value this year, that could mean they’re particularly well placed to outperform. If future oil supply becomes a more substantial problem over the medium term, oil stocks may well look attractive (and there is an interesting view of all this by Robert Armstrong in the FT here).

But what if the stronger trend to emerge from the Ukraine crisis is an acceleration of the drive to alternative and green energies - what then? Maybe oil stocks are deservedly cheap and cleantech stocks will usurp them.

A look at the strongest 1-month momentum (relative price strength) stocks in the S&P 500 echoes this slightly mixed picture:

Source: Stockopedia

Traditional oil majors are right up there. Indeed, Occidental Petroleum (NSQ:OXY) has been in the sights of Warren Buffett in recent weeks, with the billionaire legend taking his stake to nearly 15%. Others in the sector are also flying - like Apa (NSQ:APA), Baker Hughes (NSQ:NKR) (oilfield services) and Chevron (NSQ:CVX).

But they are interspersed by companies like Solaredge Technologies (NSQ:SEDG) and Enphase Energy (NSQ:ENPH) - both of which are alternative energy businesses. So it seems there is some hedging of bets going on when it comes to deciding who will be the medium-term energy winners.

If you’re interested in investigating oil and gas shares that have been seeing accelerating recent momentum, you can take a look at this screen - Oil & Gas stocks on the move. It looks for technical ‘golden crosses’ and high near-term relative price strength in the sector - and the table shows the ValueRank of those shares to give and indication of what looks cheap and what doesn’t.

Commodity questions

Another observation from the list of high relative strength US stocks (above) is that major fertiliser producers like Mosaic (NSQ:MOS) and CF (NSQ:CF) have also performed well over the past month. This is yet another consequence of the war in Ukraine and the disruption in global supplies of those products. According to the American Farm Bureau Federation, Russia is the world’s largest exporter of nitrogen (16.5% of global exports in 2018), the third-largest phosphate exporter (12.7% in 2018) and the third-largest potassium exporter (16.5% in 2018).

Another eye-catching chart from the AFBF is this, which shows just how much wheat Ukraine is usually responsible for exporting…

Source: AFPB

Ukraine exports most of its harvest between August and November, which means the normal sowing season is just around the corner. But with restricted access to oil (and fields that are warzones) the supply is likely to be curtailed this year. The country apparently exported $5.1 billion of wheat in 2021, with Egypt, Indonesia, Turley, Pakistan and Morocco accounting for 50% of sales (source: AFBF) - so supply problems could well be a concern further down the line.

Final thought…

It would be easy to namecheck Morgan Housel all the time, given how good some of his writing on finance and psychology is. But there was an article from him recently that really caught my eye. It’s about how unrealistically high expectations are a road to misery and you can read it here - Low Expectations.

Morgan’s point is that having low expectations is a superpower - especially for investors - not because we should all be expecting to do badly. But more that by accepting the likelihood of losses, you're much more likely to stick with the stock market long enough to benefit from the big wins that make up for it.

In these volatile times when things are perhaps more uncertain than normal, that idea makes a lot of sense.

Have a great weekend.