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Volume 11, Edition 6 | February 14 – February 18, 2022

A Portfolio Love Story

Doug Walters, CFA
Valentine’s Day is an excellent time to remind investors that a long-term relationship with your portfolio can help you get through the ups and downs of global geopolitical turmoil.

Contributed by Doug Walters, Max Berkovich, David Lemire

The sweetness of Valentine’s Day could not help investor sentiment this week which has soured on the geopolitical saber-rattling in Eastern Europe. We have been fielding questions recently about how these tensions will impact portfolios, particularly international stocks. Our message to investors is to embrace a well-diversified portfolio.

There are a few problems with the questions we have been receiving about the conflict. The first is that it is impossible to know if the conflict will escalate. It could, but then again, it could fizzle out with each side claiming some sort of victory. The second is that if war breaks out, there may be human tragedy without investor tragedy. We need only look at the current pandemic to be reminded of this paradox.

So what are investors to do? We recommend falling in love with a well-diversified portfolio. The well-diversified portfolio has many endearing qualities, including exposure to:

  • multiple regions (US, developed international, emerging markets),
  • large and small-cap stocks,
  • persistent factors (quality, value, momentum, size),
  • fixed income (government and corporate), and
  • inflation protection (equities, EM debt, gold, TIPS).

Your relationship with your portfolio should be long-term and not dependent on the ups and downs of the global news cycle. As long as you and your portfolio are compatible from a risk perspective, you should be prepared to ride the market through economic sickness and health.

So should you own international stocks during Eastern European tensions? Yes. They are an integral feature of your portfolio soulmate! Not only that, you owe them a thank you, as they have significantly outperformed US stocks this year.

Headlines This Week

US stocks have slipped the past couple of weeks, dropping close to the January lows. Geopolitical tensions on the Ukraine – Russia border and a hawkish Federal Reserve are driving sentiment.

Trouble on the Border

Tensions between Russia and Ukraine escalated, creating a material risk for investors to ponder.

  • If there was any doubt about whether the tensions are market sensitive, those were answered this week. On Tuesday, stocks bounced nearly 2% when Russia announced it was withdrawing some troops from the border. Yet stocks continued declining the rest of the week as the US refuted Russia’s withdrawal claims.
  • It is impossible to know how this standoff will end, and it is dangerous to make assumptions about how portfolios will behave. Diversification is the best approach.

High Expectations

The Fed released its FOMC notes on Wednesday, providing additional insight into its thought process for unwinding stimulus.

  • Rate hikes are expected to begin in March. Expectations had been growing for a 50bp rate hike (typically, the Fed moves in 25bp steps). But there was nothing in the report to add fuel to the 50bp case.
  • However, the committee did stress that “flexibility” will be necessary so nothing can be ruled out.

The Week Ahead

War and Peace

No matter what earnings or economic releases are on deck next week, all eyes will be on the Ukraine border.

Holiday

US markets are closed Monday for President’s Day.

  • Officially the holiday is the observance of President George Washington’s and Abraham Lincoln’s birthdays.

Purchasing Managers

While US markets get a break on Monday, the European and UK Purchasing Managers’ Indices (PMI) are released. The US PMI will come out a day later, on Tuesday.

  • This is a read on the prevailing direction of economic trends in the manufacturing and service sectors.
  • The monthly survey collects data from supply chain managers.
  • A reading over 50 indicates expansion. All three are expected to be above the 50 mark.

Preliminary Read

A preliminary read of the US Gross Domestic Product (GDP) for the fourth quarter of 2021 is out next week.

  • The GDP is expected to have expanded 6.9% in the quarter versus the same period in 2020.
  • This is not new data as there was an advanced read issued at the end of January, but any revision from the early number could be newsworthy.

Eye on Inflation

On Friday, markets will carefully watch the Personal Consumption Expenditures Price Index (PCE).

  • The Federal Reserve’s preferred inflation measure has been steadily climbing every month for the last year. A break in the trend would help ease investor concerns and possibly sway interest rate observers to ratchet down interest rate hike predictions.
  • Current inflation expectations are for a ½ of 1% increase in January.

Going Shopping

Personal Spending, Durable Goods Orders, and the Consumer Sentiment Index are out the same week as some big retailers report earnings.

  • Home Depot (HD), Lowe’s Corp (LOW), Macy’s Inc. (M), and The TJX Companies, Inc. (TJX) all release quarterly earnings.
  • Bookings Holdings, Inc. (BKNG), HSBC Holdings Plc (HSBC), and Warren Buffet’s Berkshire Hathaway, Inc. (BRKb, BRKa) are the other big companies reporting.

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