When Whales Fight

February 24, 2022

As we consider the tensions driving recent market movements, a Korean folk saying seems apt:

“When whales fight, the shrimp’s back is broken.”

The idea is that bystanders get hurt when big folks duke it out.

What are the tensions? Who are the bystanders?

An invasion of Ukraine may occur in the coming days or weeks.

Or it might not. It’s really impossible to say.

The U.S. has closed the embassy in Kyiv and warned of a dramatic buildup of Russian forces on the border with Ukraine.

It’s unclear whether Russia is willing to diplomatically resolve security concerns about Ukraine joining NATO.

However, a ground war between NATO and Russia would be extremely damaging, so it seems (hopefully) unlikely that Russian troops would actually invade.

Then again, they might. The Russian economy is not in great shape and sometimes desperation shapes decisions. 

That seesaw between high tension and relief is likely to add a lot of volatility to markets as investors digest the latest news.

The Russia-Ukraine situation is less important medium to longer-term to the markets. The Fed is more important. 

The Federal Reserve may aggressively raise interest rates to fight inflation.

With inflation at historic highs, some Fed officials worry that the central bank’s credibility — AKA, their ability to manage inflation and employment — is on the line. Others, like us, believe their credibility has been undermined by their inability to accurately forecast inflation and take necessary steps months, quarters, or a year ago to combat its effects in advance versus now trying to play catch up. 

Rate hikes are coming in 2022, but how many and how quickly? That’s up for debate by the Federal Open Market Committee next month.

Fed “hawks” want to raise rates quickly to try to bring inflation under control and increase consumer confidence and trust.

Fed “doves” want to carefully raise rates and watch the data to avoid damaging growth or spooking markets.

These are big decisions with big consequences for us, the economy, and the markets. 

While FOMC meetings are often dry affairs, the next one looks to have as much drama as an episode of Succession.

Bottom line: there are a lot of factors driving market movements, so we can expect to see plenty of volatility in the weeks & months to come.

Given the Fed and geopolitical tensions at play, a pullback or correction would not be surprising, either. 

We have been suggesting a correction could be in the offing for several quarters and after the very strong returns in 2019, 2020, and 2021; likely.

Q: If you have been suggesting it could happen, what have you done to protect my portfolio?

For balanced accounts in our managed program, starting in January with the rebalance, we reduced our overall allocation to stock. We have since added between 5-10% inverse ETFs ( depending on your strategy and risk category) which go up in value if the stock markets decline. This is a fast and efficient way to reduce your exposure to stocks without selling a lot of our core positions and without generating capital gains. We also added 5% into Gold back in January as another hedge against market volatility. 

Take a deep breath, be grateful for all the good in our lives, and focus on our proven strategy. And remember, a longer-term strategy doesn’t mean it outperforms every day, every week, or even every quarter. It does mean that it has been around and has worked during the 2008 financial crisis, 2015 and 2018 market corrections, and lastly, during Covid. It ultimately will get us to the other side of this environment of US slowing economic growth, and a Federal Reserve raising rates into this slowdown. 

Let’s hope for peace and clarity in the weeks to come, and the “doves” on the Fed will be the ones guiding the interest rate policy.

We are keeping a close watch and will reach out as needed.

Be well,

Michael W. Landsberg, CFP®, CIMA®, AIF®

Principal ǀ Chief Executive Officer |Chief Investment Officer