February turned out to be all heartbreak with Cupid showing no love for the markets last month.
January’s downward trend continued as Putin continued his saber rattling, positioning, and
sending more troops to the Ukraine border. The Biden administration warned that the Russian
invasion was all but certain. Unfortunately for the world, it didn’t take long for Biden to be proven
right. On February 24 th Russia officially began the invasion of Ukraine and the market reacted
with wild swings. Oil which had been climbing prior, instantly spiked to over $105 per/barrel, a
level not seen since 2014 Crimea Crises. Market Indexes opened heavily in the red with the
DOW dropping more than 800 points, but as with most crises’ it pays not to panic sell.
Unbelievably the markets actually closed the day in the green, with the DOW mounting another
massive 1,000-point intraday comeback. Yet another great example of how important it is to
control one’s emotions when investing. Obviously, the volatility has continued in the day’s since,
which is to be expected during times of geopolitical risk. This invasion has placed the markets
focus squarely on energy and the added pressure increased costs will have on inflation and
GDP. The Fed had already been walking a tight rope between balancing future interest rate
hikes and over cooling the economy. Adding higher energy costs to the mix increases inflation
and puts a dampen on economic growth, adding even more complexity to this already delicate
situation.
Although Russia’s invasion of Ukraine will remain a risk for markets, it will no longer be center
stage as we move into the latter part of March. The headlines will transition away from invasion
and sanctions to reopening and earnings. With the main question being, “How resilient is the
consumer in the face of higher prices?” My feeling is they’ll continue to surprise in the face of
multiple headwinds.
Since the COVID bottom hit in March 2020, the market mantra has loudly been, “buy the dip!”.
This very basic strategy consistently led the markets to new highs over the past two years. To
put things in perspective, last year, the S&P 500’s deepest pullbacks were approximately five to
six percent, and the market rebounded so quickly that investors didn’t have time to blink (let
alone feel any pain from such a mild drawdown).
The market seemed to defy gravity and pundits wanted an explanation. The diagnosis: the
“Robinhood Effect” – a term that describes irrational stock price movements caused by retail
traders buying stocks without regard for their fundamentals. Recently, it seems Robinhood and
his merry men have either been wiped out by massive downward moves in their favorite names,
or have packed it in and gone back to work. There is nowhere better to illustrate this destruction
than namesake Robinhood Markets, Inc. (HOOD), whose IPO was met with great fanfare in
2021. Robinhood toted access to its own IPO at $38 per share to all its users. For a split
second, the villagers cheered as the share price spiked to $85, but it’s been all tears ever since
with the shares hovering around $11. Once the insider lockup ended, the selling intensified,
resulting in an approximate 85% loss from its peak.
Here’s a short list of popular retail stocks that are down more than 60% from their highs:
Peloton, Moderna, Paypal, Square (Block), GameStop, AMC, Roku, Roblox, Zoom, Etsy and
Oatly, to name a few. I don’t see any of these stocks returning to their previous highs, so buying
and hoping isn’t a sound strategy in my opinion.
It’s no wonder the dip isn’t being bought; traders are licking their wounds and investors are
pausing to sift through the carnage. Like it or not, the correction is clearly here and neither
Powell nor the mythical man in tights are swooping in for a quick rescue. So now is not the time
to be speculating, be cautious of valuations and lean toward value and Growth At a Reasonable
Price (GARP), as I don’t predict a raging growth rebound anytime soon.
As you can tell from the title, I’m nostalgic for the days of physical newspapers and the
neighborhood paperboy. It seems so much more civilized to crack open the business session
and have the word “correction” in large font right there in the headline. Instead, iPhone
notifications are an instant reminder of yet another negative day in the markets. For me, it’s just
extra sensory overload since I’m already glued to my Bloomberg terminal.
Unfortunately, I can’t sugarcoat it for you: corrections are hard. They come without warning and
wreak havoc on every human emotion trying to bait investors into behavioral miscues that
destroy long-term value in portfolios. During periods like these it’s easy to get beaten down by
the constant wave of negative headlines. We’re all aware of the elephant in the room – inflation
and the Fed’s perceived ability to curtail it without sparking a recession. The Fed's policy for
normalization of rates is what started the shakeout and correction at hand, the invasion just
accelerated it. I believe that once the Fed actually raise rates as expected in March, this will be
a positive signal to the markets. Why? The Fed is prudently acting out on the path they’ve set
out, building confidence in their abilities to curb inflation. Additionally, the fact that they are
raising rates signals that the Fed believes the economy is in a strong enough position to absorb
higher rates. Remember: unemployment is at 4% and companies are begging for workers. So
having the economy moderate from scorching to hot could be just the trick to getting the
markets back on track in the second quarter.
