When Worlds Collide
Putin has invaded Ukraine.
Investors have been preparing for such an eventuality, as we’ve seen the major indexes decline in recent weeks, but the reality created another bout of selling early today before a rally pushed stocks into the green.
By day’s end, stocks erased early losses. The Dow rose 0.3%, the S&P 500 Index gained 1.5%, and the Nasdaq added 3.3%. Sell the rumor, buy the news? It depends on how things unfold in the coming days and weeks. At a minimum, expect volatility.
Let’s add one more headwind. Investors are also grappling with higher inflation and expectations the Fed will raise interest rates this year to slow inflation.
Yet, strong corporate profits and the growing economy have cushioned the downside.
Russia makes noise
Massing troops along the border of Ukraine has created a heightened level of uncertainty for investors. Increased uncertainty translates into additional outcomes for the U.S. and global economy. Most of those outcomes, even if remote, are to the downside.
Therefore, short-term investors recalibrate and attempt to discount the uncertainty. Over time, the new reality gets incorporated into the outlook and the focus returns to the domestic economy. That has been the historical pattern.
Stocks had been priced for perfection. However, a more hawkish sounding Fed and Russia’s aggressive posture toward Ukraine provided the perfect excuse for short-term traders to take profits.
While we have been due for a market correction, attempting to time such a correction is all but impossible. There are those who have been calling for a correction for over a year and were stampeded by the bulls.
Besides, you must be right twice to be successful—near the top and near the bottom. The smartest analysts haven’t figured out that equation, and they never will.
Longer-term, the biggest influence over stocks is the U.S. economy. But how the invasion affects consumer psychology will play a big role.
A significant impact on the U.S. economy from a war in Asia doesn’t seem likely. Are people going to avoid dining out, or, for that matter, skip the purchase of an appliance or a planned trip? It seems unlikely.
Moreover, a larger war involving NATO and the U.S. is not currently in the cards based on repeated statements from European and U.S. leaders.
But what’s happening overseas is something you and I cannot control. Control what you can control.
Maintain a disciplined approach. Your financial plan helps manage emotions. It is the roadmap to your goals. It incorporates the unexpected potholes you will hit along the way to your goals.
Just as it helps prevent you from taking on too much risk when stocks are soaring, it also helps prevent emotional decisions that are rarely profitable when stocks are declining.
Oh, and so far, the S&P 500’s decline has been modest 10.6% from the Jan 3 peak (Yahoo Finance data).
While we won’t forecast a market bottom (who really can), BMO Investment Strategy and FactSet calculated that the average rebound following a 10-20% correction was 13.8% after 3 months, 20.0% after 6 months, and 27.3% after one year (data back to 1970).
Recall that stocks came back after 9-11. Though the road was bumpier, history tells us stocks came back after Pearl Harbor.
Before we wrap up, let me offer a sobering perspective for those who are suffering in Ukraine. What’s happening at home doesn’t compare to what’s happening to the moms, dads, sons, and daughters in Kyiv. I wouldn’t want to trade places with them. I’m sure you wouldn’t either.
Finally, I’m reminded of a comment from UBS analyst Art Cashin. 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.”