I imagine some of you remember back to your school days. There was always that guy or gal that just had to pick on other people. The bully on the playground. Maybe you were a victim of this behavior at some point. It is a horrible feeling. That bully typically is much bigger or has a group that provides an overwhelming force, and you feel helpless. Unfortunately, we witnessed this first with Georgia, then Crimea, and now Ukraine. What is happening will impact the global economy so that all of us will feel some of the pain.
This month I am writing to you with a heavy heart. The events in Ukraine that I mentioned last month have deteriorated into an invasion that few understand. The history and intent seem to be that Mr. Putin would like to rebuild the old USSR, and he is intended to do so at any cost to human life and suffering. I would be remiss not to acknowledge the travesty, yet this monthly informational note aims to address what things like this may mean for investors.
This month we will discuss:
- The Geopolitical Environment and Investing
- Are Growth Stocks Dead
- Less Understood Reason for The Market Decline
The Geopolitical Environment and Investing:
Some found it odd that the markets rallied after we heard the invasion of Ukraine had started. It is an age-old phenomenon that often happens when a perceived bad event becomes a reality. Once the uncertainty has been removed, the market no longer trades in anticipated fear and thus moves higher on the actual news. This activity reinforces why we do not attempt to “time the market.
We expect the markets to continue to speculate on “what’s next.” Will Mr. Putin be content as he was in 2014 with his invasion of Crimea to wait a bit before he continues to move forward with his plans? Will China take this as an opportunity to invade Taiwan? Given the uncertainty overseas, will the Federal Reserve continue with plans to raise rates? Will the supply chain issues worsen because of the invasion?
I can only speculate on any of these questions. I would not be surprised to see China make a play for Taiwan while the rest of the world is distracted with supply chain issues; however, currently, China seems to be giving Russia the proverbial ‘cold shoulder.’ Worldwide sanctions against Russia will drive up the costs of energy, agricultural goods, and many commodities worsening inflation. The Federal Reserve will still raise rates in March; however, this is priced into the markets.
Here again, the equity market may rally once this becomes a reality. Supply chains that have improved since last month will likely worsen but for entirely different reasons. Supply chain issues will likely center more around commodities and energy rather than semiconductors unless China does invade Taiwan.
For more information on the Ukraine situation, why Russia wants Ukraine, how long this may last, and the long-term impacts on the markets, click here to schedule a call.
Are Growth Stocks Dead?
Regular readers already know my answer. Growth stocks are not dead. Many of them, so-called ‘Growth stocks’, will gain business and profitability due to the supply chain issues and, yes, even the invasion. Understanding which ones are likely to benefit while others falter is a big part of what we do for investors at Guardian Rock. We have taken advantage of the decrease in growth stock prices to harvest tax losses and purchase shares of quality companies at what we believe are trading at significantly discounted prices. Price fluctuations like we have seen over the past several months are part of the markets’ ordinary course, driven just as much by market sentiment as factual evidence. Embracing the emotions or sentiment of the overall markets and making prudent decisions while current events cause other investors to panic is what makes a long-term successful management plan work.
Less Understood Reason for The Market Decline:
Less talked about reasons for the market decline is the impact of increased investor margin. Since 1995 there have only been three instances when the amount of money investors have borrowed to purchase stocks has risen by more than 60% year over year.
Once just before the ‘dotcom’ crisis in early 1999-2000, again just before the financial problems of 2007-2008, and again in 2021. These margin accounts, backed by the purchased securities, are then called in as the collateral declines in price, causing forced sales at even lower prices to meet those margin calls. We believe much of this activity has played out over these first two months of 2022.
In Summary, there is typically a notable significant decline in the stock market about every two years, and in most years, there is at least one decline of over 10% at some point during the year. Since we have not seen a major decline since the spring of 2020, this current decline in early 2022 is not out of the ordinary.
These declines produce opportunities for the prudent investor so hang on tight and stick to the plan!
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