Happy Saturday, friends! It’s been a headline-grabbing couple of weeks with a full year’s worth of volatility crammed into a short time period. Let’s not dilly nor dally and get right into it.
“There’s no such thing as bad weather, only unsuitable clothing.”
– A.Wainwright
Mr. Wainwright’s quote gets thrown around a lot in regions with terrible winters like Minnesota. The logic of it is fun, but some of us would argue that there are January days that are simply “undressable.” Perhaps an argument for a different day. However, if we use the quote as an analogy for the financial markets, we might be onto something.
We are living through some bad weather in the market right now with stocks down, inflation rolling, and commodity prices soaring. Add to that backdrop the headline of Russia invading Ukraine this past week, and let’s just say it’s freezing outside.
One of the worst aspects of writing about markets is saying stuff doesn’t matter. It sounds gross and lacking in empathy, but the reality is that global conflicts or domestic disturbances, like we saw here in the summer of 2020, have little bearing on market performance. Sure, there can be bad days, but overall, they have much less effect than it feels as though they should. In the case of what’s happening in Eastern Europe, it’s terrible, surreal, awful, and sad, but it’s not the primary driver of the current volatility. Yes, it can drop the proverbial temperature a few degrees, but it’s not the difference between a hoodie and a parka.
The current chilly conditions are a product of what we just lived through-stunningly good stock market returns during a global pandemic, inflation
reaching its highest level in forty years, interest rates that need to go up, and one more thing that hasn’t happened in seventy-five years – that “thing” being U.S. home price appreciation which, in 2021, put up its highest number since 1947. Crazy.
Things do need time to settle down when we have high spikes to the upside like that. It’s part of the natural cycle, like seasons. That’s not to say that the next five years can’t be great, but a little cooling-off period is helpful to prevent overcooking, which brings us back to Mr. Wainwright’s quote.
2021 was certainly a year for shorts and tanks and crops. The Miami Beach of market conditions, if you will. Even if you saw an ominous cloud out of the corner of your eye, it quickly disappeared. But weather can change rapidly, so while the sun was still blaring down in November, it was hard to reach for the cover-up or to throw on that sick Ocean Pacific jacket, but we did. And for those who showed up for the 2022 party in their 2021 attire? They are headed for hyperthermia. 2022 is more about moon boots, Girbaud Jeans, and maybe a flannel or two – “suitable clothing.”
In portfolios, that wardrobe looks like stocks that pay dividends, are cash-flow positive, and were out-of-favor for most of 2020 and 2021. Also in our closet are companies that manufacture products and provide raw materials – sectors like energy, industrials, agriculture, and defense. To avoid the chill of rising interest rates, floating-rate debt and increasing cash positions are the overcoats. The extra sweatshirt we grab while heading out the door is being patient, prudent, and diligent. Always easier to take off a layer or two than to be stuck without one.
High Note Quick Hits
The DeRiskification of NASDAQ & Friends
In November, the great reset of market prices started. It’s been “orderly” for the most part meaning that it was gradual and not panic selling. The NASDAQ had much speculation, which began to unwind. Crypto followed suit. This is a positive dynamic as orderly sell-offs take a significant portion of the risk out of all aspects of the market. The first chart below shows the number of stocks in the NASDAQ at their 52-week low over time. As you can see, we currently have way more stocks at their low than we did at peak madness in the spring of 2009. The second chart is for those with cryptocurrency FOMO. Since November, Bitcoin has had the best return of the four prominent coins…[checks chart]…MINUS 31%.
Putin the World on Blast
Even as a student of history, the invasion of a modern European country is shocking and hard to imagine. Professor Scott Galloway wrote a very good piece on the topic, discussing western ideals and the role that capitalism plays. That can be found here. There are a variety of ways this could all play out, so we are following the events very closely.
