A Month At-A-Glance
• Both equities and fixed income posted losses for the second straight month
• Russia’s invasion of Ukraine stoked volatility and injected significant geopolitical uncertainty into the market
• Oil prices eclipsed $100 a barrel—its highest level since 2014 and approaching levels not seen since before the Great Financial Crisis
Most equity markets continued their downward trajectory in February, with the S&P 500 losing 3.0%. Surprisingly, the Russell 2000 Index posted a 1.1% gain but is still down nearly 9% for the year. During the month, the S&P 500 was down as much as 12% from its all-time high earlier this year. Developed international equity markets fared better than the S&P 500, falling 1.7%, while emerging-markets stocks lost 3.0% for the month.
Much like in January, value stocks outpaced growth stocks as the latter continue to face the headwind of higher interest rates and subsequent impact on valuations. Year to date, the Russell 3000 Value Index is down 3.5% compared to a 12.5% drop for the Russell 3000 Growth Index.
There haven’t been many traditional asset classes that have produced positive gains so far in 2022. Core bonds—which investors have historically counted on as ballast in their portfolios—have fallen 2.1% over the first two months. Bonds have not acted as they typically do in risk-off markets due to the cocktail of rising interest rates, high inflation, and upcoming rate hikes from the Fed.
The major headline in February was the Russian invasion of Ukraine. Many Western governments responded with heavy sanctions on the Russian economy. The impact of those sanctions will mainly fall on the Russian economy. Based on IMF data, Russia is the 11th largest economy but is less than 2% of total global GDP. For comparison, the two largest economies—the United States and China—comprise 24% and 18% of global GDP, respectively. The global economy—and Europe in particular—could be impacted by higher energy costs given that Russia is one the world’s largest exporters of oil and gas. Crude oil prices have jumped nearly $20 a barrel to over $100/bbl since the conflict started, and that is on top of oil’s 50% price surge in 2021.
Despite U.S. intelligence agencies’ clear warnings in the preceding week, the Russian invasion did not seem like a probable outcome until it happened. But such is a world filled with many (infinite!) potential scenarios but only a single realized outcome. As Elroy Dimson of the London School of Business famously put it: “Risk means more things can happen than will happen.” And seemingly implausible scenarios happen far more often than most would readily admit (or most statistical models predict).
It won’t come as a surprise that we did not make any portfolio changes based on news headlines related to Russia invading Ukraine. Attempting to time the market based on geopolitical events is extremely difficult to do, and not something we believe one can consistently get right. To profit from news flow, investors must ask themselves if they are the only one in possession of a piece of information or have a key insight that the entire market is overlooking.
Because if other investors also have the same information, it’s likely already priced into the market. We certainly weren’t the only investors monitoring the situation in Ukraine—and prior to Russian troops amassing on the Ukrainian border, we didn’t have any unique information to believe a Russian invasion was imminent. We learned about the escalating crisis in real time—just as most other investors did (who, in turn, priced the probabilities and impacts into the market).
If an investor were to have known something about the conflict that the market didn’t know, the next step would have been betting correctly on how the collective market would react to the news. Conventional wisdom would lead most to believe that most risk assets (e.g., stocks) would have fallen on the news of the Russian army entering Ukraine. However, on that day, the U.S. stock market staged a huge intra-day rally and gained 1.5%. And the following day, international markets moved significantly higher with a gain close to 3% (MSCI ACWI ex. U.S. Index). An investor could have plausibly had the prediction exactly right but been on the wrong side of the market’s reaction.
The extreme and unpredictable day-to-day (and intra-day) market volatility has continued since the invasion. For example, on March 2, the U.S. stock market jumped nearly 2% while core bond prices dropped sharply. Then, over the next two days we saw another sharp reversal as stocks fell and core bonds rallied.
Oaktree Capital’s founder Howard Marks quoted Charlie Munger in a recent memo, saying that “selling for market-timing purposes actually gives an investor two ways to be wrong: the decline may or may not occur, and if it does, you’ll have to figure out when the time is right to go back in.” Further, if there is no decline in prices, you have to be willing to re-enter the market at prices higher then where you sold. The bottom line is that market timing in an attempt to sidestep dips in the market is extremely difficult and we don’t endorse it as a way to consistently compound the value of one’s portfolio.
Certain material in this work is proprietary to and copyrighted by Litman Gregory Analytics and is used by Argent Financial Group with permission. Reproduction or distribution of this material is prohibited, and all rights are reserved. Argent Financial Group is the parent company of Argent Trust, Heritage Trust and AmeriTrust.