First, the good news – The stock market scored an amazing comeback this week, initially selling off on the deteriorating Russia-Ukraine situation, then rallying on optimism that the conflict could have only a minimal impact on the U.S. economy. While the impact of sanctions and any further moves by Putin are hard to assess at this point, the shock and uncertainty of a war in Europe could discourage the Federal Reserve from being aggressive about hiking interest rates, which had been weighing on stocks before Russia’s invasion. America’s consumption boom is still running at full-throttle with retail sales surging in January by the most in 10 months. The spike highlights an appetite for merchandise such as cars and furniture, and might suggest consumers are buying big-ticket items before interest rates rise. The latest wave of the coronavirus is receding across much of the world which bodes well for the world economy to continue to open up.
Now for the real bad news – The invasion of Ukraine is an upheaval of epic proportions. This is not a show on Netflix and is not to be dismissed lightly. Putin has shattered peace, broken international law and is showing that ignoring all peace accords and using brute force works. It is a test for world leadership not witnessed since the Cold War days of JFK. If the US and its allies back down on Russia’s invasion of Ukraine, China will take it as tacit acceptance to invade Taiwan and we could soon be on the precipice of the next World War.
Future Wealth’s View
It is easy to make a negative call on the market when the market is already down significantly. In most cases, the late call ends up being wrong and likely marks the bottom before the upswing begins. That said, it is hard to make a call one way or the other when unpredictable events (invasion of Ukraine) happens and that is the risk that one takes when investing in the stock market. Good research can help to manage 80% of the risk but the other 20% is open to uncertainty that cannot be researched away.
Our view, at Future Wealth LLC, is that the geopolitical uncertainty could continue and the markets will be extremely volatile and every portfolio manager will be switching to seek shelter in safe assets. Earlier this year, we had highlighted the importance of rotating into cyclical sectors and value stocks, away from the growth sector. That rotation has paid off for our clients who all have year to date returns that are better than the Nasdaq (-13%) and in most cases, inline or better than S&P (-8%). Value stocks have handily outperformed all the indexes year to date and we expect this trend to continue. One of the most important lesson every investor should be aware of is that capital follows returns; returns don’t follow capital.