Inflation at home… Russia’s war in Ukraine… and rampant stock market volatility…
Judging by the feedback we’ve been getting from your fellow readers, these are the concerns at the top of your mind.
And it’s no wonder…
Yesterday, we got news that inflation in the U.S. has hit 7.9%.
That’s the highest increase in living costs for Americans since 1982.
At that rate, inflation will cut the buying power of your cash savings in half in nine years.
And that inflation is from February… before Russia’s invasion of Ukraine and the epic shock it delivered to commodities markets.
Last Tuesday, we also learned that the price of nickel – a key ingredient in electric vehicle (EV) batteries – more than doubled to top $100,000 per tonne.
This forced the London Metal Exchange, where nickel is traded, to halt trading.
We also saw the price of Brent crude oil – the international benchmark –hit $139 a barrel.
And on Monday the tech-heavy Nasdaq closed down by almost 4%.
That drop put the index 20% below the all-time high last November…
The index has since bounced. But a 20% drop – however brief – is significant. That’s the widely accepted definition of a bear market.
So for this week’s mailbag edition of The Daily Cut, we’ll focus on the global crisis… and how you can navigate it.
We’ll zero in on one question from a worried reader. And you’ll hear responses from our tech expert, Jeff Brown… our crypto investing expert, Teeka Tiwari… and the newest member of the Legacy Research team, former Wall Street insider Nomi Prins.
They each have different takes… but their takeaways are the same: This is not a time to panic sell out of your investments. If anything, it’s a time to buy quality assets at discounted prices.
And as Teeka analyst Grant Wasylik shares at the end of today’s dispatch, you want to be ready for whatever the market throws at you.
We’ll run through the six-step portfolio “stress test.”
It’ll help you sleep easy at night as the war in Ukraine continues to drive market volatility higher than normal.
Now, onto that reader question…
Reader question: What are your thoughts on the market today with what’s happening with Russia? Its market could collapse when nations put tough sanctions on it and the financial sector ties up its money. What impact does that have on our market?
– Bob M.
Jeff’s response: Hi, Bob. Thanks for writing in.
First, let me say I don’t think we’ll see a crash soon. Undoubtedly, inflation and interest rates are still a concern. Many economists and investment banks have been anticipating massive interest rate hikes this year, with a major hike this month.
But as I predicted, we’ve already seen a shift in the last few days with softer messaging from the Fed concerning interest rates.
Fed chief Jerome Powell says we can now expect a mere quarter-point jump this month rather than the half-point hike some projected.
And despite claiming the Fed would do a series of increases in 2022, Powell says events in Ukraine may change expectations.
In other words, the war in Ukraine is giving the Fed cover to avoid raising rates significantly. And the U.S. government may even temporarily suspend the gasoline tax to blunt the increase in gas prices, which have hit record levels.
Russia has some global economic influence as an exporter of energy, precious metals, wheat, and other commodities. But it’s responsible for only 1.7% of the world’s total output, making it a relatively minor player on the global stage.
The biggest pain point will be in Europe. Russia supplies about 40% of Europe’s natural gas and about 25% of its oil.
Undoubtedly, we’ll see ripple effects from higher energy prices there. These will include higher inflation and lower consumer spending.
Likewise, the military and financial upset in Russia and Ukraine may hinder the return of normal supply chains, especially regarding semiconductors.
Ukraine supplies about 70% of the world’s neon gas. It’s needed for the lasers that etch circuit designs into chips. So it’s crucial for semiconductor manufacturing. That means the chip supply shortage may take longer to resolve.
For more insight, look at the chart below. It shows the impact wars have had on the Dow.
As you can see, wars haven’t stopped the Dow’s ascent for long. And since the World War II, the Dow has raced higher after hostilities.
I believe a similar pattern will unfold this time.
Now, if China invades Taiwan as it’s threatening to… That’s a different story. If that happens, I’ll be much more worried about the global economy and global financial markets.
That’s something I’ll be tracking in my daily e-letter, The Bleeding Edge. So make sure to follow me there.
Teeka’s response: The first thing everybody needs to do when facing a crisis event… or multiple crisis events… is take a step back and relax. Look around you. Thankfully, none of us live in a warzone. And so the first thing to do is to take a deep breath. We are among the lucky ones. A lot of what’s going on in the world doesn’t affect us directly.
Now, it will impact us indirectly. We’ll have to pay more for gasoline as oil prices rise. Our grocery bills will go up. That’s not nothing. But in terms of our daily lives, nobody is outside our door with an AK-47 getting ready to shoot us. And that’s a blessing.
I’m not an expert on Russia or its markets. But I’ve been through plenty of market crises as a professional investor. I’m 51 years old. So I’ve seen the end of the gold standard… the threat of nuclear war… the Soviet Union break into over a dozen new countries… and the U.S. financial system teeter on the brink of collapse in 2008. And I’ve seen a global pandemic shut down large swaths of the global economy.
I’ve seen many different things that were going to end the world that didn’t. So the first thing to do as an allocator of capital is remain rational. Everything you’re seeing now in the headlines is temporary.
The world keeps progressing. But every now and again, we move backwards. This is one of those times. But we don’t learn unless we make some mistakes, as the world’s doing right now.
So ask yourself, “Will this situation cause a permanent erosion of value in my investments? Or am I looking at a temporary erosion?”
We’ll see continued volatility in stock and crypto prices. But that’s no reason to panic sell. It’s an opportunity to pick up quality assets – think blue-chip tech stocks and cryptos – at discounted prices.
Nomi’s response: U.S. stock markets remain choppy as Russia’s war in Ukraine rages on.
And investors are turning to gold to protect and store wealth. It’s up nearly 10% since the start of the year on growing fears of war.
But the Fed has critical policy meetings next week. And to use an American football analogy, U.S. stock market investors may have a Hail Mary pass coming their way.
At these meetings, the Fed usually announces any plans for interest rate adjustments.
And we have already received a big clue that any rate hike announcement will be tame.
After its January policy meeting, Fed chair Jerome Powell said a 50-basis-point rate hike was on the table. (A basis point is 1/100th of a percentage point.) But that was before Russia invaded Ukraine. And it was before the world slapped financial sanctions on Russia’s banks.
And last Wednesday, Powell made a rare pre-meeting announcement. In his scheduled semi-annual testimony to Congress, he said, “I am inclined to propose and support a 25-basis-point rate hike.”
Powell said the sanctions imposed on Russia and its banks to stall the invasion of Ukraine could provoke a reshaping of Western economies.
He also said the Fed would “proceed carefully” as we learn more about the economic implications of Russia’s war in Ukraine… and the West’s retaliatory sanctions against Russia.
So next week’s Fed policy meeting will likely bring an announcement of a 25-basis-point rate hike. I don’t expect anything more.
There is even a chance the Fed won’t hike rates at all. It depends how bad things get in Ukraine.
Now, I know what you may be thinking… We just got news that U.S. inflation is running at an annual pace of 7.9%. That’s its highest level since January 1982. This gives the Fed a reason to hike rates.
But the war in Ukraine gives the Fed a convenient reason to keep rates low. And stock market investors will be happy about this.
When rates are low, investors look for places to put their money that return more than savings accounts or U.S. Treasury bonds. The stock market is such a place.
There will be plenty of volatility in the weeks and months ahead. The situation in Ukraine, rising inflation, and uncertainty around the Fed’s plans guarantee that.
But I see this period of uncertainty as a buying opportunity, not a reason to sell.
Grant’s response: There’s no doubt about it… Russia’s invasion of Ukraine has upended global markets.
Everything from precious metals to fertilizer to oil is rising in price… And even after significant losses on both sides, Russia has made clear its invasion will continue.
It’s the kind of uncertainty that makes even the most experienced investors dizzy.
But as Teeka has been spreading the word on, we’ve been through market moves like this before. So this isn’t a reason to panic.
Instead, now’s a good time to check your portfolio’s health.
If you want to make sure your portfolio survives the current bout of volatility, run it through the six-step checklist below. And you’ll be ready for anything the market throws at you.
Teeka uses this same stress test in our flagship Palm Beach Letter advisory.
Since he took over in 2016, the recommendations in the model portfolio have achieved average returns of 519%.
That’s 4x the returns of the S&P 500 over the same time. And with about 20% less volatility.
And during that time, we saw several crashes. These include the December 2018 Fed rate-hike scare that caused the S&P 500 to plunge 20%… and the pandemic-related crash of March 2020 that saw the S&P 500 drop as much as 35%.
This checklist has served us well in the past. And it’ll continue to going forward. So I suggest you print it out and keep a copy handy.
Is your portfolio diversified? Numerous studies show that asset allocation accounts for more than 90% of your investment returns. Greater diversification results in lower risk. So, a good start is owning a mix of domestic and foreign stocks, bonds, bitcoin, real estate, and gold.
Do you own true alternatives? Be comfortable with being uncomfortable. In other words, think outside the box. Get some exposure to “true” alternatives like collectibles, cryptos, and private placements. They’ll generate long-term outperformance while shielding your portfolio in the meantime.
Do you have a rainy-day fund? Cash is often a forgotten asset class. But it gives you optionality. You never know what opportunities life might throw at you. Whatever they are, cash typically “meets the need” better than anything else. So it’s crucial to hold some.
What are your position sizes? Position sizing refers to the percentage or dollar amount of your investment within your portfolio. Our simple rule of thumb is: If a position gets stopped out of your portfolio, your maximum loss should be no more than 2.5–5% of your portfolio’s value.
Do you use stop losses? Stop losses let you control how much you’re willing to lose. They eliminate emotion (an investor’s greatest enemy) from sell decisions. And they protect your investments from devastating losses.
Do you have an allocation to safer stocks? Invest in companies with quality balance sheets, attractive valuations, solid earnings, and strong growth prospects.
That’s all for this week.
If you’d like to put a question to the Legacy experts, write us at [email protected].
Have a great weekend.
Regards,
 |
Chris Lowe
March 11, 2022