As horrific as any war is, taking an unfathomable toll on individual lives, history teaches that – from an economic perspective – regional battles negatively impact global markets only in the short term (days, weeks). Perhaps it shouldn’t be so, but that’s the reality.
Most analysts expect the same as the Russian bear mauls the sovereign nation of Ukraine – that global markets will get back to medium and long term trends in short order, despite the toll in human misery. Of course, all bets are off should the conflict deepen or spread to other countries.
If you own high-growth or speculative stocks, you know what I’m about to say. Beginning in 2021, a stealth bear market began taking shape in the high-growth names. Looking just at the S&P 500 or Nasdaq indices you wouldn’t have known it, as they held up fairly well. But as the losses mounted for an increasing number of individual stocks (many down 50-80% from their peaks and still falling), eventually that was bound to matter to the indices. That ‘eventually’ is upon us.
What was once stealth has now smacked us in the face (for the second month in a row). More than half the stocks in the S&P 500 are currently trading below their 200-day moving average, a heavily watched indicator signaling a bearish trend. For Nasdaq stocks, 70% are not only trending below that line, but are officially in a bear market (defined as security prices falling 20% or more from recent highs).
And for those speculative names the likes of which make up much of ARKK Innovation, the flagship fund of lauded stock picker Cathie Wood? Well, their 200-day moving averages are distant memories (ARKK itself is off 60% from its 2021 high).
Most of this mess has been driven by sky-high inflation and a Fed on the verge of pulling the easy-money punchbowl away from corporate America, forcing a re-pricing of assets propped up by the value of future profits. Although the sheer number of down-trending stocks represent historically high percentages, things are always capable of getting worse before they get better. And it looked like they were.
Then came Thursday. The market’s violent swing on February 24 (the Dow’s 800-point opening drop on the day of the Russian invasion of Ukraine, only to close in the green) indicates to me that money is itching to get back into the risk-on trade. Only time will tell whether those investors were trigger happy and acted before a bottom was put in. Or if, by their very actions, that became the bottom.
But two things are clear: greed is powerful, and money abhors a zero return (i.e., cash).
March may bring some clarity. Despite the continuing toll on lives, the pandemic is beginning to look more and more like an endemic – more predictable and manageable. The President will deliver the “State of the Union” address on Tuesday. Federal Reserve Chairman Jerome Powell will testify before Congress later in the week regarding monetary policy. And mid March, that same Fed will raise interest rates for the first time since the 2015-2018 rate hike cycle. By how much (quarter point, half a point?) and how frequently thereafter are the big questions. But at least we’ll get past that first rate hike in a couple of weeks.
So, what are the odds we’ve seen the worst of the correction? Fundstrat's Tom Lee, speaking to CNBC this past Friday, believes the markets may have bottomed around these levels as investors “buy the invasion.”
On the other hand, it’s always helpful to remember that the market can act like “a conniving huckster,” says John S. Tobey, fund manager and contributor to Forbes, “enticing investors to buy or scaring them into selling at exactly the wrong time.”
One effective strategy, says Tobey, is the bull trap. “It's a temporary upside reversal in a downtrend - particularly a fast, dramatic, exciting rise like last week.”
[Was That The Shakeout That Launches The 2022 Bull Market?]
Time will tell.
** What does protection look like? At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean an overweight position in a model built for protection (i.e., Bond Bulls, Lean Muscle, The 12% Solution). It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Finally, protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary). See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.