Despite the troubling geopolitical news overnight regarding Russia’s invasion of Ukraine, please keep in mind that as part of our cover letter to our clients within our Q1-2022 Quarterly Newsletter written prior to January 14, 2022, we noted that we “wouldn’t rule out a garden variety correction, one that will prove to be a good opportunity for long-term investors, perhaps at lower prices.”
We are there and continue to believe that absent a major escalation of this invasion of the Ukraine which in our mind includes the involvement of additional countries, it is better to be a buyer rather than a seller of equities, to include individual stocks, Exchange Traded Funds (ETFs) and mutual funds. Why this position, you might ask.
· Prior to last night’s invasion, the S&P,U.S. Total Market Index, NASDAQ Composite and Russell 2000 were all incorrection territory (as defined by a drop of more than ten percent from previous highs) with declines of 11.91%, 12.55%, 17.66% and 14.55%,respectively. The Dow Jones Industrial Average has fallen 9.44%. The above figures are from the market close January 3, 2022 and thru yesterday’s close. In our opinion these declines have been in response to the anticipation of a more restrictive monetary policy, to include Quantitative Tapering (QT) and interest rate hikes over the coming months.
· Investor sentiment, a contrarian indicator, remains near record lows suggesting that much of the bad news has been already priced into securities. As of last week, according to the American Association of Individual Investors (AAII), bullish sentiment tallied only19.2% of respondents as bearish sentiment climbed to 43.2%. Those that are neutral on the direction of equity prices totaled 37.6%.
· Although past history does not necessarily predict future events, after reviewing market returns after past crises, including the attack on Pearl Harbor, Iraq’s Invasion of Kuwait, and the attacks on September 11, it is interesting to note that the average decline is11.5%. As a point of fact, the U.S. Stock market declined 16.0% over the five trading days following September 11th,only to rebound by 24.4% within one month. If one were to define the current drop as a result of investor concerns regarding Fed Rate Hikes, Inflation as well as the potential for Russia to invade Ukraine, the 11.91% decline in the S&P 500 has already taken last night into account. We do not believe this is entirely the case. However, we do believe the majority is.
· The U.S. economy has little or no dependence upon Russian energy. Keeping in mind that approximately 30% of the Russian economy (the size of Texas as measured by GDP) is dependent upon oil and natural gas, this invasion may ironically be the undoing of Putin and the Russian economy as it may in turn finally well prompt the United States to drill, drill, drill, ultimately sending oil prices much lower. We will see.
· The above is our baseline case. However, to suggest we know what the future holds or what the end game is for Vladimir Putin is both foolhardy and arrogant. Is the endgame to bring Russia back to the glory days of the USSR or is it to quell Ukraine's possible move toward NATO? We believe it is a bit of both.
Our primary concerns for the U.S. are 1) that inflation becomes embedded in the economy; 2) the Fed is not successful in negotiating a soft landing and 3) Putin is hell-bent on recreating the Soviet Union. We will keep an eye on all three.
A final note regarding our inclination to be buyers at this time rather than sellers of equities– where appropriate we will realize currently unrealized losses for tax-loss harvesting.
Whew, what a mouthful. The bottom line – we will not be deterred from adhering to our investment strategies that have proven effective over many different market environments. Currently, this includes fundamentally strong companies with strong free cash flow, robust recurring revenue, stable supply chains and reasonable valuations.
