Markets and the Situation in Ukraine
February 24, 2022
As we write this, markets have firmly entered correction territory with the S&P 500® Index down roughly 13%, NASDAQ® down nearly 20% and the Russell 2000® Index down about 15% year to date. Many stocks are down much more than the broader indices would suggest. Markets had already been on shaky footing so far this year and news of Russia’s invasion of Ukraine has accelerated declines.
We came into this year expecting markets to cool given extraordinary gains preceding 2022, extended valuations and the prospect of tighter monetary policy. As we all know, the Federal Reserve plans to raise interest rates to combat inflation, marking a major inflection point in the easy money era that has benefitted stocks and other asset classes for years.
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Now, in addition to the prospect of tighter policy, we have a geopolitical situation that is difficult to predict. This is clearly a wild card that raises uncertainty. In other words, you have rising risk premiums in addition to rising interest rates…a fairly toxic combination for stocks. The main beneficiary of this so far has been oil/oil stocks, but at some point this could fade as spiking prices yield demand destruction. It remains to be seen if the Russia/Ukraine situation will slow the Fed’s plans, although that is a possibility.
The rampant (if not reckless) risk taking from a year ago is long gone (think SPACs, meme stocks, momentum stories, record buying of call options etc. etc.). However, there are a number of cases where valuations have become more attractive in the midst of this sharp pullback. It’s certainly difficult when company specific fundamentals are swamped by macroeconomic and geopolitical developments, but risk/reward is now looking a little more favorable now that investors are actually thinking about risk.
We will not be abandoning stocks. We stand by our prediction for more subdued returns and continue to think tighter Fed policy will present a headwind. But, stocks have at least partially discounted this headwind and the geopolitical environment has exacerbated the downside. We have been holding above average cash balances in a couple of our equity portfolios and have started to put that money to work, albeit at a measured pace.
In sum, headwinds remain but valuations are clearly much more attractive than they were a couple months ago. As demonstrated by our recent actions (more to follow) a number of high quality franchises are starting to look appealing and we think it’s time to be snooping around a few stocks.
Important Disclosures:
Past performance is not indicative of future results. Diversification and asset allocation does not ensure a profit or guarantee protection against a loss. There is no guarantee that a company will continue to pay dividends. The statements and opinions expressed in this article are those of Davenport Asset Management as of the date of the article, are subject to rapid change as economic and market conditions dictate, and do not necessarily represent the views of Davenport & Company LLC. This article does not constitute investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. Investing in securities carries risk including the possible loss of principal. Individual circumstances vary.
Important Definitions:
The S&P 500® Index is comprised of 500 U.S. stocks and is an indicator of the performance of the overall U.S. stock market. Standard & Poor’s Financial Services LLC, a division of S&P Global, is the source and owner of the registered trademarks related to the S&P 500 Index.
The Russell 2000® Index measures the performance of the 2000 smallest companies in the Russell 3000® Index, representing approximately 8% of the total market capitalization of the Russell 3000. London Stock Exchange Group PLC and its group undertakings (collectively, the “LSE Group”). © LSE Group 2021. FTSE Russell is a trading name of certain LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote/sponsor/endorse the content of this communication.
The term “Nasdaq” is also used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost technology and biotech giants such as Apple, Alphabet (Google), Microsoft, Meta (formerly Facebook), Amazon, and Intel.