Even though we ‘knew’ this would happen, it still seems more than surreal that Russia would invade Ukraine. It was obvious that Russian President Putin was building an invasion army, not a political bargaining tool along the border of Ukraine. A few weeks ago I penned that the invasion of Ukraine was imminent. There is certainly no pleasure in being ‘right’ about that event, or even being right about the assets that help protect your wealth during tragic global events.
It was hard to think (or write) about anything else this week. The invasion of Ukraine dominated the headlines and my thoughts. I wrote my weekly MoneySense column with a heavy heart. There is certainly a clash of topics this week with Ukraine colliding with the optimism of looking to the other side of the pandemic.
Even a few weeks ago it was easy to predict what would help investors make their portfolios more battle-hardened. Gold and energy certainly rose to the unfortunate occasion. From my MoneySense post …
Brent crude topped US$100 a barrel, and gold prices hit a one-year high, reaching US$1,970 per ounce. Gold is up almost 9% from early January, while U.S. stocks (S&P 500) are down almost 12% into trading on February 24. The tech-heavy Nasdaq slid into a bear market, now down more than 20% from recent peaks.
Inflationary forces
Commodities have continued to work well. The crippling sanctions being applied against Russia might fuel more inflation. Russia is a resource-based economy.
Energy stocks and commodities exposure have been consistent themes on Cut The Crap Investing. You’ll find gold and commodities and long-term U.S. Treasuries offered for consideration in the new balanced portfolio that follows the all-seasons portfolio approach. You might consider energy stocks as a core all-season holding. That is the only sector that works against inflation through the last 100 years and more.
In the Financial Post, David Rosenberg added …
The key here is that risk aversion will escalate and liquidity preference will accelerate. Stepped-up sanctions are going to exert a powerful inflationary tax on the world economy because the one thing we know with certainty is that Russia is the biggest exporter of wheat and fertilizer, and the third-largest exporter of crude oil and coal, while supplying 40 per cent of Europe’s energy needs.
Keep in mind, that as I mentioned in the MoneySense piece, wars are surprisingly not bad for stocks. Though there can certainly be some rough patches in the early stages as the uncertainty of war, and the fog of war takes hold.
The largest historical drawdown due to war was in conjunction with Nazi Germany’s entry into what was then the Czechoslovakian nation in 1939, and the attack on France in 1940. The S&P 500 fell by 20.5% and 25.8% respectively during the following 22 trading days.
One year after these instances, the market was up almost 19% and 9.2% respectively, eliminating much of the drop.
During both combined world wars, the U.S. stock market grew 115%.
Cautious about stocks
The investment story that dominated headlines heading into 2022 was the fear of rising rates and what affect that might have on the economy and stock market performance.
In the Globe and Mail (paywall) Ian McGugen suggests the possibility for modest returns for stocks …
Hiking cycles are bad news for both stocks. Over the past several decades, U.S. stocks produced modest real returns of only 3 per cent a year when the Fed was raising rates. In comparison, they produced real returns of 9.7 per cent a year when the Fed was cutting rates, according to the latest edition of the Credit Suisse Investment Returns Yearbook, published this week.
And of course, inflation is a risk to the economy, and markets.
That said, many recession-watch indicators are not yet flashing red.
It usually takes two or three years for rising rate environments to cause a recession. And there is no guarantee that central banks will get aggressive with rate hikes. They will weigh rates hikes against ongoing inflation and economic growth readings. Many experts think the central bankers may get considerable help on those fronts with easing inflationary pressures. Slowing growth is already underway.
That said, we are still likely to settle at inflation rates above 3% for a few years goes the consensus guess.
Ready for anything
Are you ready for war, nuclear war, or a pandemic that might be worse than the last two years? How about a prolonged depression? Stagflation? The last two years have taught us that the unthinkable can happen. The key is to be prepared and aware. But we should not let fear cause investor paralysis. We can manage the risks for most any environment.
We need to stay invested.
How did the pandemic portfolio perform?
And if you are early in the wealth building stage, with decades to go, you might simply add to stocks on a regular basis. As always, invest within your risk tolerance level. You can check out various risk level examples on the ETF portfolio page.
The good COVID news
Cases numbers are falling rapidly in new cases, hospitalizations and deaths.
We can help Ukraine
Please consider making a donation with the Canadian Red Cross to help those in Ukraine.
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I’m generally bullish on the economy (U.S. and Canada) but war has definitely not been a consideration I was giving to the portfolio. In the information age, it really is astonishing that we can have such large scale global conflict. Hopefully it is resolved sooner than later.