Fundamentals Versus the Fog of War

Fundamentals vs. the Fog of War

March 4, 2022

The resilience of the Ukrainian resistance has inspired the world even as Russian aggression intensifies, threatening citizens, cities and critical infrastructure.

While hardly on the same plane, Wall Street resilience has also been tested, with major market indices quickly moving from loss to gain and gain to loss day to day. When we said last year that 2021’s lack of market volatility was an anomaly, we didn’t know how quickly we’d be proved correct. It’s not uncommon to see the stock market move 2% intraday from its lows to its highs and back before settling to close up or down a fraction.

Commodity traders are experiencing their own market volatility. Sanctions on Russian energy companies have pushed oil prices to a 13-year high, and they’re poised to go higher. Combat in “Europe’s breadbasket” has caused wheat prices to spike to the highest level since 2008—in peacetime, Russia and Ukraine combine to provide about one-third of the world’s wheat exports. That said, the impact that even the hint of a change in the war’s tenor can have on prices means trying to jump into the commodity fray is fraught with risk—a gamble we’re currently unwilling to take.

In Senate testimony on Thursday, Federal Reserve Chair Jerome Powell noted that Russia’s outsized stake in the global energy market and other commodities will cause already higher-than-normal inflation to go higher, at least for a while.

In an unusually explicit preview of the Federal Reserve’s upcoming policy decision, Powell stated that he would propose a 0.25% increase in the fed funds rate at the Fed meeting in two weeks. The Fed seems determined to tackle inflation and engineer a “soft landing” for economic growth amidst full employment.

We see no reason stocks can’t continue to provide moderate but steady returns, even with ongoing volatility and the many other bumps we’ve mentioned. Corporate earnings growth remains strong, dividends are rising, and if February’s jobs numbers are an indicator (and we think they are), demand remains high. (Unemployment fell to 3.8% and the U.S. added 678,000 jobs last month, the most since July 2021.)

With zero exposure to Russian stocks, based on our latest data, and a diversified allocation to assets that have historically endured geopolitical and inflationary pressures, our core client portfolios remain ready for anything. We will not let even dire war reports distract us from our investment discipline and helping you achieve your long-term investment objectives.

U.S. Fundamentals Offer a Bright Side

Both the U.S. economy and consumers continue to recover from the omicron variant’s disruption earlier this winter: The manufacturing and service sectors are expanding, not contracting; employers added 678,000 jobs in February while unemployment edged lower; and TSA data shows that travel has rebounded to near pre-pandemic levels. What’s more, the restaurant reservation app OpenTable reported that the seven-day average for “seatings” was recently above where it was in 2019. These are all healthy signs.

And speaking of health, the COVID-19 case rate reported by the Centers for Disease Control has fallen precipitously since its January peak. All good news, and another reason we’re not suggesting, despite the trauma overseas, that we try to game the market by reducing our allocation to stocks.

Two Bad Months Is Nothing New

We can’t help but take umbrage with the bearish-sounding claim by Bloomberg this week that February marked the second consecutive month where stocks fell—and that this was something investors hadn’t seen since…wait for it…the sepia-toned days of October 2020.

You may have caught wind of this overwrought fretting, so here’s some data to provide a bit more balance: How often do you think the S&P 500 index has fallen two months in a row? About 17% of the time since 1957, and 12 times in the last 10 years.

But let’s expand the time horizons. Investors have had a 2-in-3 chance of making money over any three-month period since the S&P 500’s 1957 inception (and those odds aren’t too shabby for such a short stretch) and a better-than-80% probability of making money in stocks over three- and five-year periods.

Note: Table covers specified periods on a rolling month-end basis from the S&P 500 index’s 1957 inception through February 2022. Sources: S&P Dow Jones Indices, Adviser Investments.

A Buy Sign for Energy?

This week’s reader question: With oil prices spiking, is now the time to bulk up on energy sector stocks?

Liz Laprade By Senior Research Analyst Liz Laprade

The price of crude oil has reached its highest level in more than a decade, leading to sticker shock at the gas pump. We also saw energy sector stocks, which popped 27% year-to-date, rise another 5% in the aftermath of Russia’s invasion of Ukraine.

So, is now the time to fill up on energy shares? That depends on your time horizon. Energy could be a logical buy in the very short term if further supply disruption comes to fruition. But in the longer term, I’d be wary.

As one of the largest energy producers in the world, Russia controls the oil and gas pipeline into many countries across Europe. And if Putin decides to fight back against sanctions, withholding supply may be his economic weapon of choice—which is likely to further spike prices. We’ve seen some anticipation of that, with crude oil prices up 34% year-to-date and barrel prices jumping to a five-year high, above $100 a barrel.

However, there’s a lot we don’t know, and uncertainty often stokes fear-based trading. With elevated prices, energy stocks and commodity futures could sell off as traders take profits. The sector is already coming off a huge jump last year, surpassing pre-pandemic levels. Never underestimate the trading whims that blow through commodity markets.

Also, keep in mind that there are valid reasons energy exposure in the S&P 500 has shrunk so significantly over the last few decades—from 25% in the ’80s to less than 4% today. Price volatility, low returns on invested capital, and ongoing supply and demand issues have all hurt oil producers. More recently (and maybe most importantly), so have environment, social and governance (ESG) concerns and the move to renewable energy. With fears that Russia will use oil and gas as a form of control, the push for renewables can only intensify, leading to longer-term headwinds for traditional energy companies down the line.

I’m not saying never buy energy, but beware that this potentially attractive short-term trade may be much less rewarding for long-term investors.

Chart of the Week: Keeping an Eye on the Homes Front

We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found informative.

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso 

People are buying houses at a clip last seen in the housing bubble of the mid-aughts. Do we think this is another bubble in the making? No. Housing has been misaligned since the pandemic struck—first demand dried up, and then the market rebounded rapidly. With time, and as we return to “normal,” we expect housing to regain equilibrium.

That said, we would not be surprised to see sales trend up over the next few months as buyers move to take advantage of lower-for-now mortgage rates.

The average rate borrowers were getting on 30-year fixed mortgages had been rising since last summer. It peaked near 4% last month, close to a three-year high. But in the aftermath of the Russian assault on Ukraine, mortgage rates fell to 3.76% on Thursday as investors flocked to safety—lowering borrowing costs for buyers. With the Federal Reserve on track to raise the fed funds rate this month, mortgage rates will likely follow suit, making this temporary reprieve all the more enticing for buyers looking to lock in a lower rate on their loan.

Is the housing market in a bubble
Note: Chart shows annualized number of existing home sales on a monthly basis from December 1999 through January 2022. Source: Federal Reserve Bank of St. Louis.

Financial Planning Friday
Planning in Your 50s

Raising a family and building your career are enough to keep most people plenty busy—so much so that many don’t take financial planning seriously until their 50s, when they first see their retirement horizon approaching.

If you are in your 50s, here are five tips to make sure that you’re preparing properly for that next big financial milestone. (If you’re not in your 50s, check out our previous entries on tips for your 20s, 30s, 40s or your 60s.)

  1. Understand your spending. Most everyone knows (or can quickly calculate) how much they earn. Fewer people have a handle on what they’re spending. Knowing what it takes to maintain your lifestyle informs the rest of your financial plan. We’ve found that how a client spends is one of the most important factors in determining whether they will succeed or fail in reaching their retirement objectives. As a first step, take a look at our Budget Worksheet to figure out your monthly cash flow.
  2. Continue investing for the long haul. It’s tempting to think about making your portfolio more conservative as your 60s start coming into view, but keep in mind that you will likely need your nest egg to last another 20 to 30 years or more. While everyone’s risk comfort zone is different—and there’s never any need to take wild risks—growing your portfolio faster than inflation should still be your primary goal. Historically, that’s required an investment in stocks.
  3. Play catch-up. Turning 50 means you’re eligible to make catch-up contributions to your retirement accounts. If you turn 50 this calendar year, you can contribute up to $27,000 to your 401(k)—the $20,500 standard limit plus a catch-up contribution of up to $6,500—for 2022. Additionally, you can make catch-up contributions of $1,000 each to your health savings accounts (HSAs) and individual retirement accounts (IRAs). (And remember, you have until April 18, 2022, to make those HSA and IRA contributions for 2021.)
  4. Consider long-term care. It isn’t pleasant to think about, but the reality is that half of people turning 65 today will require long-term care. If you’d feel better having long-term care insurance, the best time to purchase a policy is typically in one’s late 50s, before premiums begin shooting higher.
  5. Clarify your retirement vision. Now’s a good time to start reflecting on what retirement means to you. Do you want to move somewhere warmer? Make time for volunteer work? Wear out your hammock or keep your hand in your profession through consulting? Don’t forget to include your spouse, partner or other loved ones in your planning.

These five tips apply to most anyone in their 50s. But it’s also important to recognize that your situation is unique. A financial plan that reflects your priorities is priceless—which is precisely why we offer this service to our wealth management clients at no extra cost. If you would like our help to make sure you or a loved one have checked the right boxes on a financial plan, please contact your team. We’re here to help.

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser Investments in the Media

Chairman Dan Wiener spoke to The Philadelphia Inquirer about Vanguard funds affected by Russia’s stock market collapse. Dan then appeared in Citywire, positing one reason why Vanguard is giving up on plans to launch a China equity fund.

Elsewhere, Chief Investment Officer Jim Lowell was a guest on Fox Business, making a case for blue-chip mega-cap growth and value stocks. Portfolio Manager Adam Johnson appeared on the TD Ameritrade Network with his reasons for growth investors to be bullish, and he also provided analysis for our website on current fundamentals and how stocks’ bottoming is a process.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade wondered whether it’s time to invest in energy, while Steve Johnson offered his thoughts on how you can remove emotions from your investment portfolio.

Looking Ahead

Next week brings informative reports on consumer credit, small businesses, job openings, consumer sentiment and several key inflation reads, including five-year expectations and February consumer price index data.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have nearly 4,000 clients across the country and over $7 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


Please note: This update was prepared on Friday, March 4, 2022, prior to the market’s close.

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