Control what you can control
The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please let me know.
Putin Invades
After repeatedly denying he had any designs on Ukraine, Vladimir Putin launched an invasion of its neighbor. It was the type of attack that Europe had not seen since World War II.
Recently, investors have been bracing for such a possibility. Analysts say that markets loathe uncertainty. The term “heightened uncertainty” may be a more accurate description, as there is always some uncertainty attached to investing.
When heightened uncertainty arises, it simply means that the number of possible outcomes is increasing. In most cases, those possible outcomes are usually negative, even if the odds of occurring are remote.
Short-term investors recalibrate and attempt to discount heightened uncertainty when visibility is limited, and volatility increases. Over time, the new reality gets incorporated into the outlook, as uncertainty declines, and the focus returns to the domestic economy. That has been the historical pattern.
How the war affects the U.S. and global economy will ultimately have the biggest impact for investors. Will oil prices rise? How might sanctions play out? Could we see cyberattacks or a wider war?
As of last week, the U.S. and Europe have avoided imposing the toughest sanctions amid worries about damage to their respective economies and consumer impact, according to Bloomberg News.
Outside some commodities, the U.S. has little direct exposure to Ukraine, as the illustration below suggests. When firms report quarterly earnings, they follow up with what’s called an earnings or conference call.
From Dec 15, 2021–Feb 17, 2022, just 4% of the of S&P 500 firms that conducted earnings calls during the period cited the word “Ukraine.” By contrast, 72% of S&P 500 companies cited “inflation” over the same period, according to FactSet.
Thursday’s sharp rally was probably tied to “sell the rumor, buy the news.” Friday’s rally occurred amid chatter Moscow was open to talks with Ukraine.
Over the coming days and weeks, much will depend on how things unfold. At a minimum, we may expect volatility.
Control what you can control
We can’t control what happens overseas, but we have an investment plan in place that incorporates unexpected events, as we know stocks undergo corrections from time to time.
Just as the plan helps prevent you from taking on too much risk when stocks are soaring and you may feel invincible, it also helps prevent emotional decisions that are rarely profitable when stocks are declining.
Some US Equity sectors had been priced for perfection. A more hawkish sounding Federal Reserve, Russia’s aggressive posture toward Ukraine, and the US economy growing but at a slower pace than previous periods provided the perfect situation to sell these sectors.
A remark from UBS analyst Art Cashin repeated last Thursday seems appropriate. When he began in the business over 60 years ago, a veteran trader told him, “The world only ends once. Don’t bet on the end of the world. The odds are way against you.”
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1 The Dow Jones Industrial Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4 The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5 CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.
