Rising Above Emotional Investing

Macro Uncertainty Continues to Drive Volatility 

Between the ongoing geopolitical conflict, widespread inflation and waiting to see whether the Fed can execute a soft landing – uncertainty is nearly everywhere. Uncertainty is the key driver behind the market volatility, with the VIX reaching its highest level in over a year just this week. The Fed is behind the curve in fighting inflation and the impact of their future policy is uncertain. The impacts from the Russia/Ukraine war also remain very fluid.  

It is prudent to separate the market panic from real impact on company earnings when it comes to the war between Russia and Ukraine. Without undermining the lives lost and devastating impact on Ukrainian people, it’s becoming increasingly evident that the most significant effect for global markets is related to commodities. 25% of the global wheat trade comes from Russia and Ukraine, and roughly 45% of the European Union’s fossil fuel imports come from Russia.¹ The European Union, United States and other nations along with independent companies continue to impose new sanctions or restrictions aimed at Russia, including the ban of Russian oil imports. Commodity prices have surged due to the supply constraints and uncertainties. 

Higher commodity costs and supply uncertainties contribute further to the inflationary pressure already impacting the price of goods. And many companies like KO, MCD, SBUX, AXP, V, MA and others are leaving the region – yet another form of uncertainty.² 

Chart 1: Wheat and Oil (Among Others) Driving Commodities Higher³ 

Momentum Still Ahead for Healthy Consumers 

During this time of stress and higher volatility, we must remember how special the last three years have been in the markets. Last year, the S&P 500’s total return was 28.7%, following the 18.4% returns in 2020 and 31.49% in 2019. The 26% annualized rate from these past three years is more than double the thirty-year annualized return of 11%. The past three years were quite extraordinary, driven by easy monetary policy and corporate-friendly fiscal policies. The positive news is that tailwinds from monetary stimulus still circulate within the economy and there is gas in the tank – particularly among consumers with pent-up demand and excess savings from these past three years of asset appreciation. Growth will slow due to higher inflation and tighter monetary policy, but we don’t see stagflation or recession this year.   

In February, the economy added 678,000 nonfarm payrolls and hourly earnings recorded +5.1% y/y. Bank of America announced that combined credit and debit card spending among their clients increased 21% y/y in February, while deposits also increased a healthy 15% y/y.⁴ Strong spending trends reflect individuals returning to offices, resuming in-person activities and maintaining the ability to consume even amid higher prices. Revenue expectations for the S&P 500 in 1Q/22 have trended steadily upward since the start of the year. 

Looking Ahead and Seeking Opportunity 

Geopolitical, inflationary concerns and the beginning of normalized monetary policies are driving multiple contraction and low sentiment numbers. Multiples for the S&P 500 have contracted from 23.6x to 18.5x and the Fear & Greed Index stands at an extreme fear indicator of 14 (scaled 0-100), down from 35 a month ago. Another sentiment indicator, the AAII Investor Sentiment Survey, recorded its highest one-year bearish percentage (53.7%) just two weeks ago. The good news is that this is a contrarian indicator.   

Chart 2: S&P 500 Historical Multiple Contraction⁵

Much of the impacts from emotional investing occur in reaction to what has already taken place; when multiples have already contracted and sentiment is at extremely low levels. Can multiples contract further? Sure – the long-term average for the S&P 500 is 16x. Can sentiment go lower? Sure – in March 2020 the Fear & Greed Index stood at just 2 for a few days. But timing the bottom is never considered a sound strategy for long-term investing. The strategy that we impose and recommend is positioning portfolios to be risk/reward optimized for the existing and upcoming economic cycle as best possible and taking advantage of downturns to buy quality companies on sale. 

We take an active approach towards investing in what the market is giving us in pricing and valuation. Volatility generates opportunities, especially for those able to sift through the short-term headwinds, comprehend the data and gain clarity on the path ahead. Historically, following geopolitical events that drive volatility, the S&P 500 averages 5% total return six months from an event and 12% total return one year from an event.⁶

Staying Vigilant and Investing in What We Know 

We do not know how rate hikes will impact the current pace of economic growth. We do not know how long inflation will persist or its future impact on the consumer and corporate costs. And we do not know how long the war between Ukraine and Russia will last or any other unforeseen disasters from the conflict. 

We do know that inflation is high, and we anticipate another high CPI reading for February later this week. We do know that the Fed is embarking on a rate hike schedule to move towards policy normalization. And we do know there is strong consumer demand, particularly for services and experiences. 

We invest in what we do know and closely track what it is we can’t predict, monitoring signals so that we can stay ahead of the market and well-positioned. By investing in what we do know, we can find mispriced opportunities for alpha. Staying invested during volatility is an important strategy as, historically, six of the ten best days in the market occur within two weeks of the ten worst days; those who miss the best days miss out on performance.⁷

Stephanie Link: CNBC TV Schedule

Sources

1. Al Jazeera
2. Yahoo! Finance, CBS
3. FactSet (chart)
4. PR Newswire
5. FactSet (chart)
6. Reuters
7. J.P. Morgan Asset Management

Disclosures 

Investment Solutions at Hightower Advisors is a team of investment professionals registered with Hightower Securities, LLC, member FINRA/SIPC, & Hightower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through Hightower Securities, LLC and advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources; as such, neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of Hightower Advisors, LLC or any of its affiliates.