When Worlds Collide

BY: BILL STORDAHL, CFP^®

Putin has invaded Ukraine.

Investors have been preparing for such an eventuality, as we’ve seen the major indexes decline in recent weeks, but the reality created another bout of selling early today before a rally pushed stocks into the green.

By day’s end, stocks erased early losses. The Dow rose 0.3%, the S&P 500 Index gained 1.5%, and the Nasdaq added 3.3%. Sell the rumor, buy the news? It depends on how things unfold in the coming days and weeks. At a minimum, expect volatility.

Let’s add one more headwind. Investors are also grappling with higher inflation and expectations the Fed will raise interest rates this year to slow inflation.

Yet, strong corporate profits and the growing economy have cushioned the downside.

Russia makes noise

Massing troops along the border of Ukraine has created a heightened level of uncertainty for investors. Increased uncertainty translates into additional outcomes for the U.S. and the global economy. Most of those outcomes, even if remote, are to the downside.

Therefore, short-term investors recalibrate and attempt to discount the uncertainty. Over time, the new reality gets incorporated into the outlook and the focus returns to the domestic economy. That has been the historical pattern.

Stocks had been priced for perfection. However, a more hawkish sounding Fed and Russia’s aggressive move toward Ukraine provided the perfect excuse for short-term traders to take profits.

While we have been due for a market correction, attempting to time such a correction is all but impossible. There are those who have been calling for a correction for over a year and were stampeded by the bulls.

Besides, you must be right twice to be successful—near the top and near the bottom. The smartest analysts haven’t figured out that equation, and they never will.

Longer-term, the biggest influence over stocks is the U.S. economy. But how the invasion affects consumer psychology will play a big role.

A significant impact on the U.S. economy from a war in Asia doesn’t seem likely. Are people going to avoid dining out, or, for that matter, skip the purchase of an appliance or a planned trip? It seems unlikely.

Moreover, a larger war involving NATO and the U.S. is not currently in the cards based on repeated statements from European and U.S. leaders.

But what's happening overseas is something you and I cannot control. Control what you can control.

Maintain a disciplined approach. Your financial plan helps manage emotions. It is the roadmap to your goals. It incorporates the unexpected potholes you will hit along the way to your goals.

Just as it helps prevent you from taking on too much risk when stocks are soaring, it also helps prevent emotional decisions that are rarely profitable when stocks are declining.

Oh, and so far, the S&P 500’s decline has been modest 10.6% from the Jan 3 peak (Yahoo Finance data).

While we won’t forecast a market bottom (because no one can), BMO Investment Strategy and FactSet calculated that the average rebound following a 10-20% correction was 13.8% after 3 months, 20.0% after 6 months, and 27.3% after one year (data back to 1970).

Recall that stocks came back after 9-11. Though the road was bumpier, history tells us stocks came back after Pearl Harbor.

Before we wrap up, we will keep those suffering in Ukraine in our thoughts. What’s happening here at home doesn’t compare to what’s happening to the moms, dads, sons, and daughters in Kyiv. Unimaginable.

Finally, I’m reminded of a comment from UBS analyst Art Cashion. When he began in the business over 60 years ago, a veteran trader told him, “The world only ends once. Don’t bet on the end of the world. The odds are way against you.”

This commentary reflects the personal opinions, viewpoints and analyses of the Stordahl Capital Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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