3 minute read

The S&P 500 saw one of its worst days since the Great Pandemic on March 7, as it saw a decline of -2.95% on fears that a full Russian oil boycott by the United States and its European allies would send the global economy into a recession. While it seems that investors have endured bouts of volatility, it has been awhile, as 2021 experienced only one 5% pullback. Going back to 1942, on average we see a 5% pullback about three times a year and a 10% correction about every year and a half.

So, what do we know so far:  

• Global commodity prices have surged with the Russian-Ukraine conflict given the large production of oil, natural gas, neon gas, industrial metals, wheat, and corn within the two countries. 
• In short, the global economy has rapidly shifted from its main worry of a semiconductor constrained supply chain to an energy constrained supply chain.
• The VIX has shot up to 36 after dropping below 30 after the initial first strike by Russia. 

What do we expect from here:

• Continued recalibration of risk and reward on a global scale.
• Volatility will remain within the marketplace as geopolitical headlines will drive markets short-term and fundamentals take a backseat.
• Global and domestic equities look for a floor. There’s still over $5 trillion in money market and savings accounts and over $7 trillion sitting on domestic corporate balance sheets waiting to be deployed. 
• Institutional investors putting cash to work from tail risk hedges and corporate buybacks (estimated to be $1 trillion this year) should help. 
• A divergence on central bank policy: The Fed continues its path to normal (we continue to expect 4-5 rate hikes this year) while the UK and ECB take a pause.
• We are not expecting a credit crisis such as the last time Russia defaulted on its debt in 1998. (The S&P 500 fell 11.6% within 2 weeks but quickly recovered to gain 13.8% over a the next 6 months.) 
• We expect peak inflation to now be reached further down the road in 2022. 

What will calm investors down:

• De-escalation between Russia and Ukraine 
• Stabilization of oil prices 
• Continued path to full reopening for global economies (we’re coming up on two years of the California stay at home order!)
• Measured and thoughtful “Fed speak”
• No major widening of credit spreads
• The yield curve continuing to drift slowly higher and no inversion
• Corporate fundamentals continue to show resilience 
• No weakness within the U.S. consumer

What should investors be considering: 

• Reviewing their risk and return profile with their advisor.
• Diversify within and across asset classes, don’t bet on a single style such as growth or value.
• Consider near-shoring and on-shoring and deploying capital in areas where domestic consumers drive results and are less affected by global news, such as small and mid caps.
• Consider rebalancing back up in equities if portfolio exposures are below their long-term asset allocation targets as volatility begins to drawdown. 
• The re-opening of the domestic economy is still on track and thinking about consumers moving from goods back to services.

We still believe that a domestic recession is not in the works for 2022 nor is this the end of the current bull cycle. Even with the 10% year-to-date correction for the S&P 500, over the last 14-months the S&P 500 has returned almost 19%, an astounding number. There are still many reasons to stay positive on as a long-term investor. Valuations are more attractive now than the start of the year and many global economies have yet to see the amount of re-opening that the U.S. has enjoyed so far. Both corporate and household balance sheets are strong. The unemployment rate is at 3.8%. Stay the course. Stay diversified.