Volatility has returned to financial markets since the start of the year as a result of various issues including: 1) the well-telegraphed end of quantitative easing by the Fed and its first short term rate increase planned for next month, 2) persistent inflation, and 3) Russia’s invasion of Ukraine. With so much information to digest, a “risk-off” move is logical, particularly when several equity indices were near all-time highs. While unpleasant in the short term, we believe some degree of volatility is the mark of a healthy market and we do not believe any of these developments warrant a major shift in strategy.
We appreciate rising markets as much as anyone, but when market indices repeatedly set new record highs without any meaningful drawdown, it invites a deluge of money that is short term-oriented, less discriminating, and prone to a quick retreat. In our view, investments in equities should be viewed as long term in nature, with ups and downs being expected as “par for the course.”
As always, sudden dislocations can sometimes present opportunities and we are currently evaluating some potential portfolio shifts.
Our monthly Fixed Income Commentaries have detailed why the Fed is about to change courses. In short, raising interest rates from rock-bottom, emergency levels is a sign of confidence in the economy. Now that the Covid-19 pandemic finally appears to be a more manageable health crisis, the Fed is intent on returning the interest rate regime to a normal, pre-pandemic state, albeit in a slow and measurable fashion. This alone was reason for some to pull out the sell signal, but we have long noted that low interest rates were distorting some investors’ views on valuations and were contributing to the large inflows to equity markets. The Fed hasn’t raised rates
yet, but the bond market has done some of their work for them by sending bond yields higher. While no one enjoys seeing the prices of their bonds move lower, it’s important to remember that interim coupon payments can now be invested at higher yields, which enhances an investor’s holding period return.
As for Russia, they’ve been in the proverbial doghouse for at least the last decade after similar forays into Georgia (2008) and Crimea (2014), not to mention U.S. election tampering and other nefarious actions. The country only accounts for 1.6% of global GDP and even considering potential contagion through other trade linkages, any economic spillover should be limited. Russia does matter in energy and commodity markets, accounting for about 10 million of the 100 million barrels per day of global oil production. It is also a key supplier of Europe’s natural gas (35%) and coal imports. Still, other oil producers could raise production and Europe is preparing for alternative natural gas sources.
Perhaps of greater concern is the potential for other geopolitical crises to emerge — China’s interest in Taiwan is clear — but we view this as a long term inherent risk that does not pose any imminent threat.
Regardless of the short term direction for financial markets, we advise focusing on the long term and acting as investors who can accept some “ups and downs” along the way as a normal aspect of investing. We continue to have a constructive view on corporate earnings power, the U.S. consumer, and overall global growth even with heightened geopolitical tension. We remain optimistic about many things — the resilience of the U.S. economy, advancements in artificial intelligence, and promising innovations in the vast healthcare industry, to name just a few. Our simple message: Add to your savings pool when you are able and stay the course on your long term plan.
Maple Capital Management, Inc. (MCM) is an independent SEC Registered Investment Advisor with offices in Montpelier, Vermont and Atlanta, Georgia. This commentary reflects the views of MCM and should not be considered to be investment or financial advice. MCM does not warranty these views and will not update this communication after the date of publication. Any mention of specific securities is done for illustrative purposes and the securities mentioned may or may not be held in client accounts. No assumption or assurance should be taken that securities mentioned will be safe or profitable investments. For further information, please contact Steven Killoran at 1-802-229-2838 or at [email protected]. For further information about Maple Capital, including a copy of our informational brochure, please visit our website at www.maplecapital.com.