Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you. – Larry Hite, hedge fund manager
Investors were taken on another stomach-churning roller coaster ride last week, but when the ride finally stopped on Friday, the S&P 500 Index managed to post a modest gain despite the fact that Russia finally invaded Ukraine, a move that had been widely anticipated after the huge buildup of Russian troops along Ukraine’s border. Although the S&P 500 Index is still down 8% for the year, this benchmark had fallen more than 10% from its all-time high, the definition of a technical correction, while the Nasdaq Composite Index had been down over 20% at its low from its record close. The extreme volatility in the markets last week was best illustrated on Thursday when the Dow Jones Industrial Average erased an 859-point decline to close up 92 points for the day while the S&P 500 Index erased a 2.6% decline to close the trading day up 1.5%. There is an old adage that you should “buy at the sound of cannons” when faced with a decision on what to do when war breaks out and that is exactly what investors did on Thursday. The price of oil also followed a similar pattern as U.S. crude oil settled at $93 a barrel after rising to more than $100 a barrel. While Russian President Vladimir Putin called the invasion the “demilitarization” of Ukraine and said that Russia’s plans do not include the occupation of Ukrainian territories, the U.S. and its NATO allies were skeptical and sanctions were placed on Russian banks, its sovereign debt and certain wealthy individuals and their families. The sanctions were intended to isolate Russia from the global economy but they will obviously take some time to have a meaningful effect. The Russia and Ukraine situation will be an ongoing headwind for the stock market, but if the past is any indication, patience should eventually reward investors. Historically, military crisis events such as this one create market volatility and cause stock prices to fall but stocks eventually rebound unless the crisis tips the economy into a recession. If inflation begins to cool and Russian aggression is eventually resolved, stocks should recover and mount a rally from an oversold position.
Fourth quarter gross domestic product (GDP) grew at an annualized revised rate of 7%, slightly higher than the initial estimate. Durable goods orders in January were strong as they rose twice as much as the forecasted increase while new home sales in January fell more than expected as rising mortgage rates and higher prices deterred first-time home buyers. The core personal consumption expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, rose 5.2% from a year ago, the biggest increase since April 1983. Weekly jobless claims fell 17,000 to 232,000, better than the forecast of 235,000, and should fall back below 200,000 in the coming weeks. Both the consumer confidence index and the University of Michigan consumer sentiment index for February were little changed and the latter remains near its lowest level in the past decade.
Covid-19 infections plunged 90% from the U.S. pandemic high as states began to lift mask mandates.
For the week, the Dow Jones Industrial Average was virtually flat and closed at 34,059 while the S&P 500 Index rose 0.8% to close at 4,384. The Nasdaq Composite Index gained 1.1% to close at 13,694.
The February employment report is expected to show that 400,000 new jobs were created after an increase of 467,000 jobs in January and that the unemployment rate edged lower to 3.9% from 4%. The January number was much higher than forecast. The ADP report for private sector jobs is expected to show that 410,000 jobs were added after a surprise loss of 301,000 jobs in January. Both the ISM Manufacturing and Services Purchasing Managers’ Indices (PMI) are forecast to approximate the readings in January and show continued strong growth.
The most notable companies that are scheduled to report quarterly earnings this week are HP Inc., Zoom Video Communications, Hewlett Packard Enterprise, Salesforce, Broadcom, Oneok, Workday, AutoZone, Hormel Foods, Target, Dollar Tree, Best Buy, Costco Wholesale, Kroger, Kohl’s and Nordstrom.
The extreme volatility in the stock market last week following the invasion of Ukraine by Russia is likely to continue this week as investors consider the economic effects of prolonged fighting between the two countries. Over the weekend, tensions escalated as Russian President Vladimir Putin put his country’s nuclear deterrence forces on high alert while the U.S., European allies and Canada agreed to remove key Russian banks from the interbank messaging system called SWIFT. Federal Reserve Chairman Jerome Powell is also scheduled to testify before Congress twice this week and his comments will be followed closely for any clues on whether the war in Ukraine will affect the Fed’s timetable for pivoting on its monetary policies. With the heightened volatility in the stock market, many investors probably let their emotions take over and sold their equity positions in a panic. The problem with panic selling is that most investors fail to reinvest the proceeds back in the stock market and, instead, remain in cash or money market funds. An investor has to be right twice and it’s next to impossible to know when to sell and when to buy to get back into the market. Some of the best returns in the stock market come after some of the biggest declines so it’s important to remain invested. That’s why it’s imperative to have an investment objective and corresponding asset allocation that is appropriate for an investor given his risk tolerance, age and time horizon. If investors do make the mistake of panic selling, they can reenter the stock market using a strategy of dollar-cost averaging by putting money to work by investing at regular intervals over a period of several months. But the key to investment success is having a long-term plan and sticking with that plan to ensure that the money that is invested grows over time. It’s time in the market and not timing the market that allows investors to accomplish their goals.