We started the year with a new all-time high in the stock market, which we cheered. Since then we’ve gotten new highs in inflation, new highs in gas prices, and now new highs in Russian aggression in Ukraine. We’re not cheering about these new highs, and neither is the stock market.
Stocks hit an all-time high on Jan 3rd followed by more intense volatility than we’ve seen since COVID, and stocks were down approx. -12.4%. However, March brought us back to a much more reasonable level. The S&P 500 is now only down about -6.2% for the year. We feel this is a pretty mild drop given the headlines that go From One High to the Next.
Let’s take them one at a time:
The average price of gas in Oregon is now 4.66/gal according to AAA. This is in direct response to the war in Ukraine and increased demand as the world emerges from a pandemic. Russia supplied 10% of the world’s energy, 7% of our country’s energy, and approximately 35% of Europe’s oil and gas. When we put sanctions in place to hurt Russia for their unprovoked aggression, we will suffer and are suffering from higher gas prices.
This is not catastrophic, though, and these high prices won’t last forever. Demand will reduce as we continue to discover alternatives and supply gets back to a normal level. After a long slump, the stocks of oil companies are going up, but we don’t think this is a long-term trend and haven’t added investments in that area.
Another high we don’t want. The level of inflation reached 8.5% in April, meaning, goods are 8.5% higher than they were 12 months before. This was hoped to have been temporary because of a supply shortage due to pandemic challenges but is proving to be much more persistent. The Federal Reserve has begun the process of raising rates and will do so dramatically this year if inflation does not moderate. Jerome Powell anticipates 7 rate hikes this year and is likely to increase 0.50% in May and maybe June as well. Double the 0.25% rate hikes we usually see. This is strong medicine to cure inflation, but the alternative is worse.
Where does one hideout in times of inflation? Stocks. Companies that can raise prices to offset costs can continue to do well in inflationary environments. Under the mattress is not a good place to put your money, and bonds are even worse.
Russia is ramping up aggression again and appears to be focused on carving out the eastern and southern parts of Ukraine now. This is, of course, after the spectacular defeat in Kyiv due to broken supply chains, neglected equipment, and panicked Russian soldiers retreating in disarray.
Fortunately for Russia, their unorganized and broken-down military is still being funded by all-time-high oil and gas revenues. Putin, it appears, is better at pumping gas than running a military, or a country.
The late Senator McCain said in a 2014 interview, in reference to the country’s corruption, “… Russia is a gas station masquerading as a country…”
Unfortunately, that gas station has plenty of fuel to burn down the infrastructure of Ukraine and global growth as well.
Rick Newman from Yahoo Finance says, “The International Monetary Fund estimates that Putin’s barbaric invasion of Ukraine will lower world economic growth 0.8% this year… by about $935 billion…roughly equivalent to zeroing out the entire economy of Turkey or the Netherlands. The toll could easily top $1 trillion if the war drags on or escalates.”
Slower global growth will mean slower growth for stocks. However, if you’ll forgive me for being cold and callus for a moment, war is often good for the economy and stocks. Governments have a blank check during war to spend billions on defending themselves and their allies. Our country is no different. World War II lifted our country out of the Great Depression.
So what do we do?
As always, we suggest staying the course and making no major course corrections. We’ve trimmed some of our tech-focused growth positions and bought one bank, Wells Fargo, to help us weather the higher interest rate storm in our Growth Stock portfolio. We don’t plan to make any wholesale changes to our investing strategy.
The investing strategy, which we believe is appropriate for most retired clients, already anticipates times of growth and challenges. We use a combination of several different types of investments to do this: Guarantees from a bank or insurance company, Growth Stocks to help keep up with inflation, Funds that are inexpensive and help to diversify, and Real Estate to capitalize on growth in residential and/or commercial markets.
The bottom line is although stocks may continue to get bounced around, we want to stay invested anticipating the day when the headlines will be about the END of the Russian aggression, the MODERATING of inflation, and the DROP in gas prices.
When we start to see headlines like these, stocks will head toward new highs again, and we will all benefit once again.
Every year we’re required to send out a copy of our Annual Privacy Notice to all our clients. Please click to see this year’s updated notice.
Thanks for reading,
Tim Porter, CFP®