Plan Performance Direct

Manage the Funds Podcast

Expert insight on the financial topics that impact your bottom line

Capital market update on Ukraine invasion

Henry+Horne Wealth Management President Michael Carlin discusses the current political climate surrounding the Russian invasion of Ukraine and what that could mean for the market.




Good morning, everyone. It’s Michael Carlin, President of Henry+Horne Wealth Management. And I thought it was important today for us to take a minute to reflect on what’s going on with the Ukraine crisis specifically to address it from an economic and investment perspective really quick. This is not going to be a piece on the humanitarian side. No one really knows exactly how this is going to come together with regards to China support, how far Russia is going to go, what response will be or won’t be from NATO.

But what we are going to do is reflect on what the stock market is doing this morning was a pretty scary morning, is that the market was looking to open up down seven or 800 points, which I know is an alarming, eye popping number. So it’s a good thing for us to take stock. Look at what some of the dynamics are, what some of the data continues to say, and how we’re evolving portfolios and managing your money throughout this whole process. So with that, let me go ahead and share my screen. There’s a couple of different things I want to take you through.

So here’s the first one is taking a quick look at the market now. And even as I’m talking this morning, the market relief is starting to come in a little bit. I don’t know if that’s going to hold throughout the course of the day. We’ll have to see that’s going to really depend upon the news cycle. The market is reacting right now to what’s going on in Russia.

And you can see again Russia tensions with Ukraine step up here in February and you’re seeing a pretty significant aspect of the sell out for both the S and P 500 in blue and the Nasdaq here in purple. That really started to take hold here over the past couple of weeks. And these downward trends are pretty locked in. So you’ve got the SRP 500 down more than 10%, which is referred to as correction territory. And at one point here, the Nasdaq, the tech part of the market was down a little bit more than 18%.

This is probably about 20 minutes ago. And if you get a correction of 20%, it’s considered to be bear market territory. And as we take a step back and look at the year over year numbers, you can see we had really solid year over year trends where both the Nasdaq and SP 500 again SP in blue and Nasdaq and purple, where they had moments of volatility but making new highs, making new when the parts of the market were going down, they were making higher lows. That’s a good sign. We did see a particularly notable breakdown here.

So the question becomes is where are we going to start to see some resistance? And this is one of the concerning parts, if you’re a charge or a technician, is that there’s no immediate realistic bottom in sight. On. One way to look at it is if the bad news continues to filter in, how far can the Nasdaq go down from here? And that number looks to be about another 15%, which is about the same that the S Amp P 500 potentially faces.

Now, I am not saying that either the SP or the Nasdaq are going to go down another 15%, but I can assure you that if that were to happen, we would become just on the technical analysis alone, very strong buyers of a bunch of the different growth parts in the market. And the question becomes beyond the technicals is that what are we doing? What have we been doing and how are we reacting and interpreting this data? So as I go to pull up another chart or two here, what I would share is that you know that in January we did reduce stock exposure. 4%.

It just depends upon who you are, how much cash we already had. But we were going into this preparing for some difficulties. Obviously, the Ukraine situation came up out of nowhere. We even had yesterday. There was a whole bunch of different experts saying all the reasons why there would never be a Russian invasion in Ukraine.

That turned out to not be correct. But we already took some steps. We reduced equity exposure. And a lot of the things that we introduced into portfolios are things like the distillate fund. You may see the inflation beneficiaries fund and those two holdings just right there alone with dislike.

It’s the best balance sheet, best cash flow, best capitalized companies that are all kind of combined in one fund. It’s actually done substantially better than the overall market on a few different levels. And the inflation beneficiaries, our concern is that inflation might end up being a little bit more persistent than the market had originally thought. So the inflation beneficiaries position has been a wonderful holding for us and for our clients as a real risk mitigator. Excuse me, the other positions that we put on, you may have noticed the gold miner position in your account, in your portfolio, in a position like that, with commodities going up, led by oil, gold has been a beneficiary has also had a positive trajectory.

And there’s been a couple of different interesting aspects and components of that. So I’ve spent the morning since about 330 going through different charts, data, graphs, reading, doing what it normally do to prepare for the market, to prepare our portfolios, to see if there’s more that needs to get done. So let me go ahead and share some of that data with you all. I’m going to go ahead and do this. There are 40 different graphs.

I will not go through them all. This is meant to be a pretty quick run through. So let’s go ahead and look at a few. When we’re looking at leading economic data with ism manufacturing, we’re looking at numbers that are although they have come down, we’re still very much in positive territory. Anything above a zero is indicative of economic expansion.

So if we were to see these numbers continue to trend down, maybe we would be a little bit more conservative. And perhaps at that point we would look to further reduce some of our equity exposure if we see some of the base economic fundamentals start to deteriorate. But for right now, we continue to see economic expansion. If you’re looking at things like inflation, yes, we’re seeing these numbers that are substantially more elevated than they’ve been really in any time since late 60s, early 80s, where again, at that time you’re seeing inflation well above the double digit number. We’re running at 7.5%.

And the concern with inflation that we’re seeing right now is that it tends to be a little bit on the stickier side. And stickier. I mean, rents and wages are, in my opinion, two of the bigger areas where once you have that kind of inflation, you can’t quite take it back. It’s one thing for the price of oil to go up, but we also know that when the price of oil goes up, economic conditions can change and the price of oil can go down. You don’t come back down on wages and you don’t come back down on rent because economic conditions change a little bit.

So we’re seeing some stickier parts of inflation come into the scenario, into the situation. So we think that it may be a little bit more persistent. So you’re going to see portfolio evolutions that are going to likely include furthering this inflation story with what we’re recommending. And we’re putting our client assets into tips. Break even is another way to look at inflation persistence.

Implied volatility. So here’s something that’s important, the Volatility index. If we get a big spike in it, that would be something that we might jump on and say, wow, Volatility has absolutely surged, which creates kind of a white flag of surrender to some degree that would give us an opportunity to then much more aggressively jump into the market. So should we see something there where you see the Volatility index with covet here the financial crisis, I’m sorry, here in the goodness, I’m sorry, here in the financial crisis here, this is a government bubble bursting. If we see things that get just more elevated than where they are right this minute, that would give us a signal to start to and I’m going to use this term, feather in some additional cash and or liquidation of some conservative investments to kind of gently put it into the market.

And things in areas where we think, number one, there’s been downside. And number two, where there’s obviously significant opportunity, unemployment claims continue to look good. Yes, we’ve seen a bit of a bounce higher, but they look very favorable. So the job market is strong. You look at consumer balance sheets, they’re strong.

We haven’t seen this kind of strength relative debt to income for consumers and about the strongest numbers we’ve seen in about 40 years. So that looks particularly good. I don’t see much of a change there. Again, with so many charts, there’s so little time. We are seeing the Federal Reserve cut back their asset purchases.

So their balance sheet is their purchases are starting to come down as they indicated that they would do. We’re expecting to see our first interest rate increase in March. And what I would say about that first interest rate increase is just this.

The Fed, with all their signaling and the way the market was positioning, are they going to increase interest rates 1% or 50 basis points in March? We didn’t know. Frankly, no one knows for sure. But with this kind of market energy that’s happening right now, this is really the Fed’s third mandate is to maintain financial stability in the financial marketplace. It would be increasingly more likely that the Fed should look to do a bit less than the market may have feared they were doing.

We haven’t yet seen those numbers fully manifest themselves. But all of that means is that if the Fed was going to increase interest rates up to 2.5%, which would be like astronomical, the odds start to look worse that that’s going to be the case. And what is more and more increasingly likely is that you get a Fed that is perhaps more receptive to current market conditions to say, you know what, given everything that’s going on right now, we’re going to take a little bit more of a graduated stance on the rate with which there were increasing interest rates. Maybe they’ll just do more things with the balance sheet, which would be interesting and favorable. There is a chart or two.

Let me just go through the spreads real quick.

I’ve given you a couple of scenarios where we would be more optimistic, where we do some buying or we might do some selling would be in a scenario as best summarized here. Let’s focus on this ten year US Treasury versus the two year US Treasury. You kind of take the difference between the two. Those two numbers are sitting at 38 basis points or a little bit more than one third of 1%. You can see how that has continued to come down.

And as it comes down, what it means is that the yield curve is getting flatter and flatter. If you listen to our quarterly market outlook, you’ll see that I’m acutely interested in negative or inverted yield curves. We have a pretty nice one here prior to the financial crisis, a significant one prior to bubble bursting and really what we are looking at. And again, this is kind of like if we get to this baseline zero number or worse, you might see us get more defensive because that would be the bond market for a lot of different reasons, suggesting essentially that the short term future of our economic system may be challenged and if that indeed ends up happening, It would likely translate into the fed did too much, made a policy mistake, increased interest rates too much and things need to revert themselves. Certainly go ahead and listen to the courting market outlook if you want much more data on it.

There’s so much more with regarding gold. We did see gold prices tick up here which is again for those of our clients and most of our clients have that gold miners trade. It’s been a very successful one. It’s been a hedge component. I realized that I could probably spend another hour going through at least a slice of all the things that we have to talk about.

But here’s the big picture. There are some instances where we’re going to look to take more risk off the table but we’re going to wait to see exactly how the situation unfolds. We are prepared and ready to invest more in certain parts of the market in the economy. Should we see kind of that continued meltdown we’ve already put in place? Whether it be an equity reduction for some you’re holding a bunch of cash right now and a lot of the components that we have been putting in with inflation beneficiaries this lit and so many others.

We’ve taken a lot of these precautionary steps already to help prevent what could be the worst case scenario and that’s that growth part of the market down from 17 to 18. Hopefully at some point we’ll get more clarity on where that part of the market is going. But we’ve taken a lot of steps and will continue to do so to protect your portfolio. Of course, if you have any questions, never hesitate to shoot me or Shauna or Drake or Josh or anyone in the email. We’re happy to take you through more detail about what this looks like and how we interpret the market and specifically your portfolio.

What we may be doing going forward, we’re always open for that. But other than that, I got to get back to the market. It’s been maybe a little bit longer than I had hoped. If you need anything, please let me know. Take care and have a wonderful, wonderful day.