Market Strategy 2/25/2022
Fasten Your Seatbelts; Turbulence Persists
Russia’s incursion into Ukraine creates surge in uncertainty and market volatility
The world has benefitted in the past 40 years from the “peace dividend” and the growth of global trade, technology and specialization. At this time the leaders of autocratic Russia and communist China, perceiving weakness in Western powers’ resolve, are taking this moment to seize territory and exert and consolidate their power by appealing to nationalism.
In times like this it’s important to ask, how is your portfolio positioned? Are the companies you own likely to remain profitable during challenging periods? Do they have adequate cash flow and useful products? What’s your sector exposure? Are you well diversified across cyclical and defensive sectors?
As investors, the worst time to look for an exit is when everyone is already fleeing. It’s seldom wise to sell when the selling has already begun because downdrafts tend to be overdone. Better to be prepared by maintaining a diversified portfolio and fastening your seatbelt for the turbulence ahead.
Right-size your expectations. At times like this it’s important to know what you own and how your various investments are likely to perform during times of volatility. Maintaining perspective in uncertain times can be an important discipline for investors to practice in order to retain positions that can help them meet their intermediate and long-term investment objectives.
Fortify your portfolios. If you own frivolous stocks or assets (those that make your palms sweaty and that you hope will allow you to buy a yacht in a short period of time) or have a portfolio that is overleveraged (making it difficult to absorb losses in times of volatility), consider this an opportunity to upgrade your portfolio by taking losses in more speculative issues and add to positions in higher-quality investments.
Know who you are as an investor. Don’t let your instincts hurt you if you are prone to fear. In our experience some of the best opportunities for investment arise during times like these, periods of heightened uncertainty. We can remember past events such as the start of the Iraq wars, the Chernobyl meltdown, and the 9/11 terrorist attacks on the United States (to name just a few), all ushering in bad times to sell equities. To our memory equities recovered from these very disturbing events in a relatively short time thereafter. As recently as March 2020 the S&P 500 fell 33.9% on Covid-19 concerns yet finished up 16.3% for the full year.
Don’t forget that revenues and earnings drive stock valuations. It’s important to remember that people need things: they need the products and services that companies provide. That demand is what sustains revenues and earnings and supports equity prices. So, as long as the Federal Reserve is effective in doing its job to control inflation while promoting maximum employment, businesses and consumers are empowered to do what they do best, produce and consume.
Keeping a level head usually pays off. Although equities were under pressure for much of the trading session on Feb. 24, 2022 (the day of the Russian incursion into Ukraine), we’d note that all of the major US indices closed higher on the day.
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