As the war rages on, Russia is at imminent risk of defaulting on its debts as western economic sanctions choke off its access to dollars and other global currencies to pay lenders, a move that would have devastating economic ripple effects. Inside Russia, a default would mean tremendous economic hardship for ordinary people. A lack of capital could mean massive unemployment, with the government and other major employers unable to raise funds to meet salaries. Consumer credit would evaporate, with Russian banks cut off from international financial systems. A Russian default could shake the economies of developing market countries – favored by some lenders for their high-yield upside – so profoundly that investors could ditch those venues in favor of safer bets. That would flood western markets with capital pulled out of China, India, Brazil and eastern European economies, fueling even higher price inflation. By all accounts, Putin has lost his reputation as a cold and cunning politician and will become synonymous with Hilter and Stalin and his legacy will be marked by the historical blunder of invading Ukraine.
There are some parallels between Putin’s invasion of Ukraine after unexpected successes in invading Georgia and Crimea with investors repeatedly taking risks just because it worked before. With inflation continuing to climb to 8% levels despite an imminent interest rate hike, Wall Street can’t decide what comes next. What should an average investor do now?
Future Wealth’s View
Optimists are humming that the American economy is strong, corporate profits reflect the strength, valuations have come down and inflation will subside. The bear case is the prolonged war will continue to keep inflation high, consumer spending will decline and ultimately corporate profits will come down as well, taking valuations even lower.
This is where fundamental analysis begins to show its strength. The ability of an investor to determine the intrinsic value of a company, develop a model of future cash flows, look beyond the simple P/E ratios and arrive at a mathematical decision to invest – has been lost during the bull market over the past 10 years. Most DIY retail investors hardly ever take time to do any analysis and instead, gloat over their successes and sweep their failures under the rug. That strategy works when the overall market keeps inching higher – the losses are wiped out by high performing stocks. But, when we reach a point in time where the stock market has no direction and several factors continue to weigh on the market for the foreseeable future, holding on to losing positions hoping they will come back could be a fatal miscalculation akin to Putin’s foray into Ukraine.
Our core investment philosophy, at Future Wealth LLC, for our clients is one of capital preservation with growth at a reasonable price and risk premium. Fundamental analysis of companies we invest for our clients coupled with rigorous analysis of economic indicators suggest to us that DIY investors will likely need an urgent Rorschach test to answer a few basic questions – Are you looking at a market that has hit bottom or one that has further downside? Is your portfolio filled with growth stocks that have taken a nosedive or is it protected with value stocks? Is it the beginning of a long bear market that will eat into one’s retirement plans or will the bull market resume in short order.
The answers to these questions could reveal a lot about your own perception of the market.