Overnight Russia launched an assault on Ukraine extending beyond the Donbas region, targeting military infrastructure and landing troops and tanks throughout the country. Global stocks dropped sharply while oil and other commodities exploded higher. Russian President Putin stated on Russian TV that the goal of the attacks was to “denazify” Ukraine, but that a full invasion and occupation was not the objective. Practically speaking, most analysts believe Putin’s goals are to destabilize the pro-western government in Ukraine and to significantly degrade Ukrainian military capabilities (which so far has been tacitly confirmed by most of the strikes have targeted Ukraine’s military infrastructure). The international community strongly condemned the attack, promising swift and severe sanctions which will be revealed throughout today.
There have been no shortage of negative headlines and items that are concerning such as:
- Inflation is at its highest level in four decades
- Russia is at war with Ukraine
- The Fed is tightening monetary policy
- Growth stocks are crashing
- We’re in arguably the craziest housing market ever
- Interest rates are finally starting to rise
- There are labor market and supply chain shortages
- The stock market is in the midst of a correction
- And we’ve been in a pandemic for going on two years now
How Markets Have Historically Weathered Conflict
We have been asked from our clients what will happen if/when Russia invades Ukraine? It’s always difficult to know for sure, however a reaction lower in the stock markets and higher energy/commodity prices have generally been the pattern of past invasions and wars.
Here’s a chart from LPL Research laying out the last big geopolitical events in this table, along with the amount of days it took for the stock market to bottom and then the amount of days until recovery.
Every one of these events would have represented a great reason to sell in the moment, had you been around for it. All of those sales would have been regretful not long after. If the stock market only required 31 days to fully process and recover from the horrors of 9/11, could anything that happens on the Eastern border of Ukraine become more impactful? It’s hard to imagine.
This does not make going through a market correction or the volatility we are experiencing any easier. But I do want to highlight what we wrote in our 1st Quarter market update “But just begin to mentally prepare yourself for the certain and likely deep bearishness that the next expected decline will elicit as we look toward early 2022. We will need to see that extreme bearishness in order to set up the rally to 5163-5500SPX later in 2022. So, while you will undoubtedly be bombarded with many “beliefs” that the bull market is over, I still maintain a high probability expectation that 2022 will see further gains in the market.
We understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this still-challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical to remain patient and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.”
Keeping with our comments, the majority of American investors are once again very scared about the stock market. In fact, CNN’s “Fear & Greed Index” shows that we hit “Extreme Fear” levels several times toward the end of 2021 – for the first time since the bottom of the COVID-19 crash in 2020. And with the market’s recent sell-off, investors are getting scared once again. Take a look…
And as we’ve seen throughout history, these moments of extreme pessimism and fear – like what we’re seeing right now – make the best opportunities for investors…
We saw it back in 2009, when everyone was still too spooked to buy. And yet, it turned out to be the greatest buying opportunity in American history.
Of course, we saw it again in mid-2020, when COVID-19 was still casting a long shadow of pessimism over our country’s economy. And we all know what happened next… Stocks went on to double off their March 2020 bottom. Although we are not expecting the type of performance from the March 2020 bottom, we are still expecting better markets as we get into the second quarter and the remainder of this year.
As you can see on the CNN Fear & Greed chart, just 1 month ago, the reading was at 37, a level of fear in the market. Today, we are in the extreme fear level with a reading of 15.
This chart below shows the few times the Fear & Greed Index has approached extreme fear levels. The few times it touched the extreme fear level in 2021 and in March 2020, have produced excellent buying opportunities.
These are the times to take advantage of opportunities, usually when they are the hardest from a mental and emotional standpoint.
Let’s take a look at the bigger picture. We have been very vocal and consistent that we would see more volatility in 2022 as well as a 7%-10% pullback in the market sometime during the first quarter. We have experienced both volatility and the pullback in the market.
What now? The good news is stocks do quite well after corrections. As shown in the following chart from LPL Research, this is the 33rd correction or bear market for the S&P 500 since 1950. As uncomfortable and frustrating market corrections can be, investors need to remember that future returns after such pain can bring a lot of gains. In fact, after previous corrections and bear markets, the S&P 500 rose nearly 90% of the time a year or two later with very strong returns.
I want to make a point about the bigger picture in markets. I do not think we have made a secret out of our expectation to rally to 5500 in the next major bull run I expect for 2022 into early 2023. Moreover, we raised cash (or kept cash from previous sales) as we entered 2022 in anticipation of being able to deploy some of that cash on the pullback we are experiencing in the market.
To that end, our primary expectation is that we could see a lower low than the one recently struck at 4222 on January 24th, which we have exceeded. In our intermediate term chart below, our downside objectives have been between 4100-4165 in the S&P 500. The low during trading on Thursday February 24th has been 4,114, towards the lower end of our objectives marked in the green c on the chart below. So, this is the next point to deploy cash.
My main point is that we are focusing upon where we want to deploy our remaining cash for the next bullish run we expect. Keep in mind that the bigger picture is telling us that we likely have 1,340 points higher with approximately 100-125 points of downside risk. Do not lose sight of the forest while looking at the leaves.
To summarize, we have a set up in place with extreme bearishness in the stock market, the S&P 500 has approached our downside objectives and there are news headlines about how we are now in a bear market, all which we have prepared you for as we entered 2022. This is why we focus on market sentiment which is what drives the stock market, not news headlines, presidential elections or wars.
We remain vigilant toward risks to portfolios and the economy, and we thank you for your ongoing confidence and trust. Please rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment
Please do not hesitate to contact us with any questions, comments, or to schedule a phone call or web meeting/in person meeting click here.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional. Neither APFS nor its Representatives provide tax, legal or accounting advice.