The Russian invasion of Ukraine is heartbreaking, and it is absolutely unbelievable that Putin believes he is justified in his actions. On the bright side of this very dark event, we have seen a global galvanization against his actions, and Europe has united in a way not seen for decades. Political and military experts have suggested that the conflict may end in a few short weeks, while others see this evolving into a longer-term situation. So how does this affect the stock markets and what interest rate action the Federal Reserve will take this week? In an effort to improve transparency and deliver a more consistent interest rate policy, Fed Chair Jerome Powell has signalled that there will be a 25 basis point increase in the Fed Funds rate this week, while previously many anticipated a 50 basis point hike. He has also indicated that the uncertainty of the situation in the Ukraine, in addition to the unknown impact of sanctions, will cause the Fed to be very data dependent going forward and steer with a steady hand.
Since 1950, there have been twelve Fed rate hike cycles, and in the subsequent 12 months the market has risen an average of +9%. Only once was the stock market negative, during 1972-1974, when the underlying economy was in recession. Typically when the economy is growing, the stock market falls about -15% at some point each year, often catalyzed by an unforeseen geo-political event. When this happens, we recommend that clients who have available cash and the appropriate risk tolerance to add to equity holdings. We took this action in 2011, 2015, 2018, and 2020. Last year the market only dipped about -5%, so I noted that we would likely see the market fall around -15% during 2022, which as long as the economy is still healthy, represents an opportunity for many investors. As long as the Leading Economic Indicators are rising and the U.S. Treasury yield curve is upward sloping , the economy and markets will likely continue to do well 6-12 months in the future. Both of these conditions exist today, which bodes well for the markets going forward.
The best way to protect a portfolio during uncertain times, in my opinion, is to hold stocks of very high-quality companies with little or no debt, good earnings growth, and rock-solid cash-flow. Since the founding of Pawleys Investment Advisors in 2010, we have been through very challenging geo-political times, and our portfolios have held up very, very well. I am watching the situation in Ukraine, the Fed, corporate earnings, and the underlying economy with vigilance. High quality blue-chip dividend stocks continue to be the single best way to grow wealth and meet financial goals. It is important to keep in mind any life changes that may affect how portfolios should be managed. Please keep your questions coming – we work hard to keep relevant information flowing, and want to make sure to address what is on everyone’s mind.