Feb 28, 20224 min read

Attack on Freedom & More

Near-Term response may be just the beginning

Just a couple days ago the Russian armed forces moved in and attacked numerous targets throughout Ukraine and Putin made a vow to make massive changes to their government. Change that could go as far as replacing it all together. We have been keeping our ears to the ground for the past several months and sharing our opinions via our blogs and Podcasts so the actual event itself although unpleasant, is not as shocking to the markets, our clients and followers. Believe it or not the past couple of days have ended on a high note despite what you may think when the announcement of a major conflict fills the media. The market and the public have been well informed of the looming turmoil and the animosity leading up to these events. It would seem after two trading sessions from the initial attack, that the market is beginning to shrug off some of the building volatility as the build up to the event itself has caused quite a bit of challenges in the market.

Something to remember about how the stock market tends to react to geopolitical shocks. On average the drawdown is about 5% and the rebound itself is a short couple of months. Is this considered an "average" shock, or is this more? Could this be considered a much larger conflict which leads to a deeper and longer lasting impact? We feel that although possible, it won't come to this. That does not mean that we think market volatility is over and losses will be kept to a minimum moving forward. The tweaks we've made over the past 4 months have positioned portfolios to improve given the current landscape, but containment will be important if we want to avoid a long-lasting shakeup to broader markets. The stats below can give us a glimpse of what happened in other times of major events. Although every event is very different and we don't know how the Ukraine invasion might develop, it does give some perspective and hope that things can recover if contained.

The areas of the market where we continue to see risk is the high multiple, high price to earnings type of stocks. Those can include companies that have strong potential to become some of the largest companies with disruptive technologies. The problem continues to be rising rates and inflation and that means those earnings down the road are worth less today than they were a year ago. Sectors that fall into this category are expensive technology, biotech, and large, small and mid-cap growth. We have mentioned this time and time again on the Podcast as well as Blog posts over the past several months. These are areas of the market we feel are out of favor for the time being and will have their time to shine again, but for the near-term we have been trimming, reducing or eliminating exposure to these areas. That's not to say there aren't exceptions to the rule, but broad exposure to these has proven to be a bad place to hang out. The chart below gives some examples of ETF's that represent our rationale and reasoning to reduce positions. Performance is a year to date snapshot of how things have played out.

Market opportunities will present themselves throughout the year and we lean towards more of an active than passive management style. We continue to be focused on more of the longer term performance of portfolios and year end returns versus the weekly or monthly. Areas of the market where we have seen and continue to see promise is in financials, commodities, value, industrials, real-estate and energy. Equities that live in those spaces include banks, insurance companies, staples, precious metals, and other lower multiple stocks that have been left for dead in the past decade. Boring? Yes, but sometimes boring is okay if it's making money in a challenging environment which is attacking broad markets and portfolios around the world.

With growing panic, apprehension and fear, does that mean we're headed for a bear market? We don't believe so and we look to the VIX index to get a better understanding of how volatility plays out in comparison to returns. The VIX or Volatility Index basically measures the amount and extent of pricing fluctuation on the stock market. The higher the VIX levels, the more rapid and violent prices change. Typically when levels are extremely high, it means stocks lose value in the short term. There are some recent levels in change of the VIX that suggest the market will shift before year end. Time will tell and the market impact remains to be seen. If the Ukrainian invasion grows to last longer and become more involved with other countries; our outlook could change quite rapidly. For the time being we remain positive on the outlook of the markets over an extended time frame and believe the best place to be is stocks as a way to hedge against rising costs and inflation.

And that's only the beginning...Reach out and schedule a consultation to discuss your situation. We'll walk you through your options and help you make the right choice for your goals. Click below to take a listen to the latest PennyWise Financial Podcast and hear more commentary on Ukraine, Tax items you need to know and much more.