How is my portfolio impacted by the Russia/Ukraine conflict? Will the market keep going down? March Newsletter
Firm update: Dalton and I continue to the process of updating the Marketing name from Cedar Wealth Partners (which Dave is a founding partner) to Hobbs Wealth Advisors. As I’ve mentioned before, this is simply a name update to distinguish more clearly the services Dalton and I provide as compared to the broader Cedar Wealth firm. We’ll still be using the same processes we’ve used throughout the years.
What we do at Hobbs Wealth Advisors: We work towards helping clients to stop second guessing their financial decisions, reducing and in some cases eliminating financial anxiety. We never try and predict the future or the markets, we can only control our response to outside stimuli. Clients of Hobbs Wealth Advisors are goal-focused, long-term, globally diversified, strategic investors who are seeking to be excellent stewards with their wealth.
Index Update (As of 02/28/2022 from Yahoo Finance)
S&P 500 (Large Cap): +14.81 YOY | -8.07% YTD | +9.04% 20 Year Return
Russell 2000 (Mid, Small Cap): -6.8% YOY | -8.66% YTD | +8.99% 20 Year Return
Global Market – ex US: -2.94% YOY | -5.77% YTD | +7.33% 20 Year Return
crowd protesting; sign that says “stand with Ukraine”
How is my portfolio impacted by the Russia/Ukraine conflict?
This has been the most common question we’ve heard over the past month. It’s an understandable question, especially seeing that the Russian stock market is poised to be closed, as of this writing, for the fourth straight day (3/3/22 WSJ.com). It’s also interesting to note than many Russian companies are going to be cut from Global indexes, which will most likely pull the company values even lower. While the Russian stock exchange is closed, other international ETFs that follow the Russian economy aren’t closed. Simply by looking at two of these ETFs, they are down about 70-75% since the start of the year (ETFs are RSX and ERUS, from Yahoo Finance). I don’t know about you, but I certainly feel like the Global sanctions against Russia are working and I doubt the populous in Russia is excited to see these downturns.
With the above in mind, how does this all impact your portfolio at Cedar Wealth? Let me answer this in two ways.
The first: how much direct exposure do we have to Russian companies in our portfolios? I just finished a review of the portfolios as of March 2nd and the highest exposure in any of our portfolios to Russian companies is 0.0388%. Our exposure is next to nothing.
The second question is: how will the Russia/Ukraine conflict impact my overall portfolio?
This question is less clear. Our assumption is that this will create elevated oil prices, but we don’t anticipate oil prices to have an extended climb as we anticipate the World’s oil demand to simply shift around. This is exactly what an inter-connected Global economy does. We also anticipate the current supply chain issues to continue and result in continued elevated inflation. Even though Russia isn’t a massive import/export player, they still are, or maybe were, part of the Global economy and Global supply chain. While the prospect of continued higher inflation doesn’t excite anyone, some of the portfolio changes we made earlier in the year position us well from what could be continued inflation.
With an unknown outcome with Russia and Ukraine, the largest impact to all our portfolios is simply the unknown, which creates current volatility, defined as positive and negative price swings. So yes, everyone who is invested in publicly traded companies is being impacted simply by the uncertainty of how far and how long this will last.
Let me ask you two questions in response to this current conflict.
Do you think the world is going to end because of what’s happening in Eastern Europe? If you answer “Yes” please contact us immediately as we want to transfer your money to you immediately. If you answer “No” – stay the course with a globally diversified, strategic portfolio, like the ones we manage.
When you think about the next 5, 10, 20 years, do you believe the Global Economy is going to continue it’s forward march? If you answer “No” please contact us immediately as we need to develop a significant plan change. If you answer “Yes” – stay the course with a globally diversified, strategic portfolio, like the ones we manage.
graph showing declines during each year in the SP 500 and ending growth
Is -11.16% enough?: Since 1980, the AVERAGE intra-year S&P 500 decline has been -14%, as report by J.P. Morgan. The low point so far in 2022 for the S&P 500 is -11.16, on February 23, 2022. I wonder if that -11.16% is the full correction for the year? We of course have no way of knowing, but here is what we do know.
With history as a guide, we know that market declines, or corrections, are normal. As I just mentioned, the average market decline is -14%, yet when you look at the compounded return of the S&P 500 from 1980 to 2021, the average gain was +12%.
Market down turns are opportunities. If you’re retired, market downturns are opportunities for your dividends to buy discounted shares. If you’re accumulating assets, market downturns are opportunities to buy discounted shares with new money. Market downturns are just another reason why we purposefully look at rebalancing portfolios weekly.
Now, raise your hand please if you like market downturns? If you really see them as opportunities. I doubt any hand will raise because NO ONE likes it when the market declines, I mean NO ONE! However, if you don’t think the world will end during your life and if you think the global economy will continue its advancing, then why would you think that when equities decline in price that they decline in value as well? If the world isn’t going to end then when equity prices decline, their value should increase, right? Please stop me if my logic doesn’t make sense.
We are all human, which means we’re all emotional beings. Even though there is a clear-cut answer to equity prices and equity values, it sure doesn’t feel this way; good news, you’re normal. This is the disconnect between our minds and our hearts. There’s nothing wrong or broken with any of us, it’s just the way we’re wired.
So here’s my encouragement: accept the unknown, accept the truth that we will never know what tomorrow will bring. Accept your belief that you don’t think the world will end during your life and that you do believe the global economy will continue its advancing. Then with those beliefs, stay the course, invest what you can when you can, follow your written, stated plan that gets updated regularly by our firm. As you have questions, please ask.
1. Two March Anniversaries: Part of our job for our clients is to do our best to remember recent history. March is a special month in our minds because it marks the anniversary month of the two most recent recessions. (Sources below from Yahoo Finance)
March 2009 marked the end of the financial recession, this month ended the torrid -57% decline that marked the worst recession since the great depression. Since the market bottom, the S&P 500 has risen at an astounding annualized rate of +16.9%
March
March 2020 marked the end of the Coronavirus recession. Since that market bottom, the S&P 500 has risen at an annualized rate of +41.43%.
Now, you might be thinking… “it’s not right or fair to look at annualized returns since the market bottom, because you’ll of course have wonderful market returns.” Ok, you’re right, looking at investment returns since the market bottom isn’t necessarily a “right” way to market the market’s progress. So let me provide you with the return data from right before the recessions.
October 9, 2007 (market peak before the financial recession) return data through the end of February 2022 for the S&P 500 has an annualized rate of return of 9.6%. Not bad!
February 19, 2020 (market peak before Coronavirus recession) return data through the end of February 2022 for the S&P 500 has an annualized rate of return of 15.47%. Not bad either!!
Besides the history lesson, the real reason I’m bringing this up is that we can NEVER know what the market is going to do or not do. I was recently asked by a client why we didn’t go to cash during or before a recent market downturn. The answer is always the same, we never know when the downturn will occur, or how long it will last, or when the market will recover, or what to do with the cash when we put it in cash! Using history as a guide, I personally like the odds of leaving the money invested. Every other time in history, the market low has led to new market highs.
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, thank you for your trust, if you have any questions/concerns please contact me.
-Dave
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David Hobbs, CFP®, CLTC | Wealth Advisor | Founding Partner
Offices in Indianapolis & Terre Haute
Office: 317-559-2940
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Email: D.Hobbs@CedarWealthPartners.com
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