Staying on track may be the key to investing in wartime

Entire sectors of the global economy are in turmoil following Russia’s invasion of Ukraine, leaving investors worried about how to respond. Should they buy energy stocks? Defense Contractor Shares? What about agriculture? Is it time to go to the checkout?

Investors had good reason to be wary, even before Russia’s President Vladimir V. Putin invaded. Market forecasts for the first quarter predicted a lukewarm gain of less than 5 percent for the S&P 500. A report from financial data firm FactSet Research noted that such a sluggish level of growth would be the lowest since the fourth quarter of 2020.

Instead, the S&P 500 ended the quarter lower, losing 4.9 percent. Inflation fears led to a sharp decline in late January and stock prices remained volatile even before the Russian attacks started in late February. Stock prices plummeted just before the invasion, gained ground and fell even lower in early March. But since February 23, the day before the invasion, the index rose 7.2 percent for the quarter, suggesting there is more than just the war in Ukraine that is worrying the market.

“Initially, there was a lot of fear of what might happen and, as usual, most of it didn’t happen, so people are pulling out,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “Most investors think, ‘I don’t have to worry about this from a financial point of view,’ and that’s right.”

That’s not to say that investors making the obvious war games haven’t been able to cash in on the carnage. The energy sector was already forecast to do well in 2022 before war sanctions shut down Russia’s oil exports, finishing the quarter just slightly below its 52-week highs. Exchange-traded defense industry funds, or ETFs, that can be bought or sold as stocks throughout the day deliver similar results, with the iShares US Aerospace & Defense ETF, SPDR S&P Aerospace & Defense ETF, and the Invesco Aerospace & Defense ETF all making a profit. Additional tensions on the already tangled supply chain and the expected disruption of Ukraine’s massive wheat crop also pushed commodity funds higher.

Instead of worrying about Mr. Putin, investors should be worried about Federal Reserve chairman Jerome H. Powell. The Fed raised interest rates by a quarter of a percentage point for the first time since 2018 in March and forecast six more hikes this year.

“The market reaction over the past four to six weeks can almost all be attributed to the Fed and how interest rates have changed,” added Mr McMillan. “There has been very little response to the events in Ukraine.”

Investors have not fully understood what rising interest rates mean for stocks in the financial sector, especially banks and insurance companies, which have suffered from a prolonged trajectory of near-zero interest rates, said Andy Kapyrin, Regent Atlantic’s co-chief investment officer. “The market has not yet priced in the benefits financial stocks will see from higher interest rates,” he said. “Banks in particular can make a much higher interest margin if short-term interest rates rise.”

One fund he follows is the Invesco S&P 500 Pure Value ETF, which invests in S&P 500 value stocks, with about 40 percent of fund holdings coming from financial services.

Stocks that could suffer from higher rates include shares of small, emerging software and e-commerce companies and other capital-intensive technology companies that have relied on heavy borrowing at low rates until they can become profitable, Mr Kapyrin said.

Individual investors must maintain a long-term horizon, even in retirement, which could be 30 years or more, said Simeon Hyman, a global investment strategist at ProShares. That means ignoring stock prices based on temporary upheavals.

“Historically, the stock market downturn caused by major geopolitical events has been fairly short-lived,” said Mr. Hyman. “If you look at what happened after 9/11, the global pandemic or the invasion of Kuwait, the decline was measured in weeks or a few months.”

One fund that focuses on interest rates is the ProShares Equities for Rising Rates ETF, which is limited to sectors that have historically outperformed the market when interest rates rise. About 80 percent of the interests are in the financial, energy and materials sectors. For a more defensive stance, the ProShares S&P 500 Dividend Aristocrats ETF, an equity fund with growing dividends that can offset the effects of inflation and rising interest rates.

Amy Arnott, a portfolio strategist at Morningstar, strongly warned investors against dumping stocks and switching to cash. The paltry returns on bank deposits and money market funds won’t necessarily improve with the Fed’s rate hikes and even if they did, they still wouldn’t beat inflation, resulting in a loss in real dollar terms. Worse, saving stocks raises the much more difficult challenge of deciding when to get back in.

“You can always find a good reason to sell when there’s a lot of uncertainty,” Ms Arnott said, “but markets are recovering faster than people would expect.”

She said it was important not to overlook the consumer staples and assume that too high operating costs will reduce operating margins. The reality is that those companies can pass their higher costs on to consumers, with some companies using inflation to hide additional price increases.

“Consumer goods tend to hold up well when there is a lot of volatility in the market,” said Ms. Arnott.

Investors should also pay more attention to bond funds, several analysts said. Bonds serve as an important stabilizer in a diversified portfolio, but the current rising yields are detracting from the value of existing lower yielding bonds. That trend will reverse when the old bonds mature and are replaced by new bonds with higher yields. The yield on five- and ten-year corporate bonds is already around 4 percent.

“There’s a lot of talk about, ‘Interests have gone up and my bond fund’s value has gone down,’ but your bond fund can now reinvest your money at a higher yield,” said Mr. McMillan.

One step that doesn’t involve drastic changes is a simple one, said Leanna Devinney, vice president of the Fidelity Investment Center in Framingham, Massachusetts: Rebalance your interests.

“During volatile markets, the diversification of your assets can shift, and rebalancing gives you the ability to manage risk and keep your investments aligned,” said Ms. Devinney. “We want to buy low and sell high, and rebalancing is a great way to do that.”

How often investors need to rebalance their positions depends on the degree of market volatility, she added. Fidelity’s management team has already rebalanced investments six times this year.

For investors still concerned about Ukraine, Covid, supply chain shortages, oil prices and other geopolitical turmoil, the best move is to build a diversified portfolio that can face global crises without major adjustments. And investors who have already done so shouldn’t make hasty decisions, analysts say.

“The best advice for investors is to try to resist the urge to make drastic changes to your portfolio,” said Ms. Arnott. “As long as your original plan still makes sense, stick to your plan, check that your portfolio allocation is aligned with your objectives, and rebalance if necessary.”

If investors are still feeling anxious after all that, consider this comment from Commonwealth Financial Network’s Mr. McMillan: “If you look at the past century and how markets perform in wartime, they actually do better,” he said. . “Am I concerned as a citizen? Absolute. Not so much as an investor.”

Leave a Reply

Your email address will not be published.