Sometimes There's No Place to Hide

March 7, 2022

The goals of a weekly investment note are that we want them to be 1) timely, 2) informative, and 3) actionable.  In times like this, however, events overwhelm intent, and the best course of action is to step aside and stay focused on the long term.  In homage to the late rocker Meat Loaf, ‘Two Out of Three Ain’t Bad’.

Also, in times like this, writing well in advance of a deadline is a fool’s game.  Last night’s perspective may be completely wrong.  Or, so generic as to be useless.  We are inundated by market commentaries along the lines of ‘We expect markets to remain volatile while the war in Ukraine continues’. 

That said, following are a few stream-of-consciousness comments on the financial world:

Economic growth will slow but inflation will continue at a high level.

Regardless of the timing and outcome of hostilities, global trade will not recover quickly.  Supply chain issues will remain, exacerbated by a slow wind-down of sanctions against Russia and a reset of fragile trade agreements.  A European recession is a rising risk, and will not be confined to that region.  Oil at $100/barrel increasingly looks like a floor, not a ceiling.

The Federal Reserve cannot ride to the rescue this time.

The Fed’s belated recognition of inflation being embedded, not transitory, backed it into a corner.  With no significant chance of easing price pressures, the Fed must follow through on its announced path of gradual rate hikes through 2022.  The best that can be expected is a slower pace than was anticipated just a couple of weeks ago.

That said, the recent bond market rally is about two-thirds ‘flight to quality’, one-third a lowering of growth prospects.

There is no compelling reason to chase yields now; better opportunities are ahead.  Slow and steady wins the race.  Don’t load up on multi-year commitments based on today’s news.  Rates will rise.

Don’t try to catch a falling knife.

One of the challenges in equity investing for the long term is a compulsion to act in the short term, driven by the day’s headlines.  It’s either ‘the world as we know it is ending’, or ‘fear of missing out’ (FOMO in market-speak).  As we saw a few weeks ago, you can get both extremes in a single day. Never let your actions – designed to meet long term goals – be governed by the emotions of the moment.

Focus on what you want to achieve.

Invest consistently and conservatively over time.  You will be rewarded for patience, persistence, and discipline.  While markets have been negatively affected by economic and geopolitical events, one benefit is that expectations have adjusted to meet reality.  Valuations are more reasonable, reflecting a recognition that volatile markets will be part of life for some time to come.  A wise investment manager once told me, ‘The outcome of a bear market is the transfer of wealth from weak hands to the strong.’  Stay the course.  Let us know how we can help – your success matters to us.