Views as of Feb. 25, 2022
By Chhad Aul, Chief Investment Officer and Head of Multi-Asset Solutions, SLGI Asset Management Inc.
The S&P 500 hit a record high on Jan. 3. Since then, it has fallen steadily, as investors reacted to the possibility that the U.S. Federal Reserve would soon raise interest rates. By mid-February, the S&P 500 was down 10.2% and the tech-heavy NASDAQ 17.6%. At the same time, the market largely ignored the Russia/Ukraine conflict. But over the last three weeks, as it became clear that a negotiated settlement could not be reached, the market began to price in a worst-case scenario. And early on Feb. 24, with Russia launching a full-scale invasion of its neighbour, the S&P was off 12.8%, leaving it deep in correction territory.
While markets started to recover later in the day, major indexes fell sharply around the world. The Russian market was not immune, suffering an historic collapse, while the ruble fell to a record low against the U.S. dollar.
At the same time, the bond market priced in the invasion’s potential to damage the global economy, with the yield on bellwether U.S. ten-year treasuries falling to 1.9%. Gold, a hedge in times of crisis, climbed 3%. And benchmark oil breached the US$100-a-barrel mark on supply concerns. Oil could surge even higher and threaten the global economy, if Moscow withholds energy supplies to Europe, which imports 40% of its natural gas from Russia . And the immediate threat to Ukraine’s natural gas supply network, caused prices to spike 20% across Europe.
The invasion also puts central banks, that were poised to raise interest rates, in a difficult position. For one, the Fed, which was expected to rise rates to combat inflation running at 7.5%, may have to reconsider the pace of those increases. This, while inflation shows little sign of abating.
Investor behaviour is important, particularly in times of market volatility. During downturns, there is often regret. There may be an instinct to cut losses. Fear is a powerful emotion that feeds on itself. However, in times like these times we can rely on history. Long-term studies show that, when investors attempt these timing decisions, their returns generally suffer. They have to be right twice: on the sell and on the buy. And it’s hard to get both right. We also know that following a market decline, we typically see a period of recovery. It could happen suddenly, or it could take a few years. But we know that investors that remain calm may benefit from the eventual recovery.
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