The benchmark S&P 500 has recently lost around 8.5% since the start of the year, after a rapid rebound from this week’s lows, which were reached on concerns over the fallout from the attack. of Russia against Ukraine, which have spooked markets already on edge due to expectations of an increasingly belligerent Federal Reserve.
After weeks of warnings from Western leaders, Russia on Thursday launched a triple invasion of Ukraine from the north, east and south, in the biggest attack on a European state since the World War II, which threatens to upset the post-Cold War order on the continent.
The US responded by imposing sanctions on Russia, targeting big banks and members of the elite, along with new export controls.
Buying stocks on the downside has been a successful strategy for market participants during the S&P’s more than 200% rise over the past decade, and the recent fall is the biggest since the index lost almost a third of its value during the COVID-19 rout in March 2020 – which itself proved to be a tremendous buying opportunity.
Yet while bargain hunters over the past two years have relied on the Fed’s historically loose monetary policy to offer support for equities, they now face a central bank that is expected to pull out all the stops in its fighting inflation – starting with a widely anticipated rate hike this month.
“Investors were tricked into buying the dip because they had the support of the Fed. you don’t have the Fed on your side,” said Burns McKinney, senior portfolio manager at NFJ Investment Group.
Kyle Bass, founder and chief investment officer of the hedge fund Hayman Capital Management, believes investors have yet to factor in all the possible consequences of Russia’s invasion of Ukraine, including a protracted conflict that would weigh on global growth and drive up inflation by pushing up commodity prices.
“It will get worse before it gets better,” he told Reuters in a recent interview. “Asset managers do not have these results in their realm of possibility.”
Bass said investors should own assets that can retain their value in times of inflation, such as commodities and real estate.
McKinney buys dividend-paying stocks that he believes will withstand future market volatility and invests in defense companies.
In addition to the rapidly changing situation in Ukraine, investors will be watching February nonfarm payrolls data next week – the last employment report the Fed will consider before setting its monetary policy later in the month. Fed Chairman Jerome Powell said he expects to raise interest rates in March for the first time since 2018, and markets are pricing in a rate hike from the current level, close to zero. 79% by next February. [FEDWATCH]
Although Ukraine remains on the move, proponents of buy-on-weakness argue that stock declines due to past geopolitical events were short-lived. LPL Financial’s study of 37 major geopolitical events since World War II found stocks were up 11% on average a year later, provided there was no recession.
Earlier this week, BlackRock increased its strategic overweight in equities, believing that investors may be overestimating the degree of aggressiveness that central banks will need to show in their fight against inflation. JPMorgan analysts, meanwhile, argued that “the initial volatility around the rate hike didn’t last and stocks hit new all-time highs 2-4 quarters later.”
S&P 500 valuations sit at a forward price/earnings ratio of 19.4, down from 22.1 at the start of the year, adding to the attractiveness of equities for some investors.
Others, on the other hand, take a more pessimistic view, with the markets expecting a tightening of the Fed’s monetary policy by next February, in the face of galloping inflation.
“We are pessimistic,” analysts at BofA Global Research wrote in a recent note, saying they believe the “bullish era of central bank excesses, Wall Street inflation (and) globalization” is coming. over, to be replaced by a “bearish re” of inflation and geopolitical isolationism. They advised investors to sell during market rallies.
Charles Lemonides, portfolio manager of the hedge fund ValueWorks LLC, raised bets against some stocks, including semiconductor maker Broadcom Inc and plant-based meat company Beyond Meat Inc, skeptical of the markets’ ability to sustain a recovery in the face of a Warmongering Fed.
“The reality is that the market has rallied strongly and losing some of those gains is inevitable,” he said.