Russia/Ukraine and Fed/Interest Rates; How Quickly Things Can Change
by Hodges Private Client Team, on Mar 8, 2022
War. Just not a fun topic to discuss….ever. It’s a truly sad state of affairs, and all we can do is hope that there is an end to this sooner than later and that as many lives as possible are spared. Given all the news, I figured that we might as well chime in with our perspective around this terrible situation. For starters, we are not in the business of debating public policy or global events. Yet we are in the business of having to interpret their effects on the financial markets and specific sectors/industries. We have no way of knowing how this plays out, nor the duration. Efforts to do so would be fruitless, in our opinion.
Before we get into the nuts and bolts, if you have been a reader of our content or a listener to our podcast, Horse Cents Street Smart Investing, you might remember some of the things we try to convey. In any correction, the worst thing one can do is react with emotion. It would be far better to sit on one’s hands than make an irrational snap decision during a correction. You might also recall that the market tends to pre-price events in a short amount of time. This happens in both down and up markets and is one of the main reasons that playing chicken with Mr. Market (chicken = timing) is not a prudent way to invest.
I’ll give you a couple of examples from the past and then we’ll move on to the present situation. 1) When Covid-19 first hit back in late February ’20, there was a panic selloff that riled markets for about 35 days. I believe it was one the fastest and deepest market routs in history. By mid-April most broad indices had rallied halfway back, and by late summer, they had rallied all the way back. Mind you, the cause of this, Covid-19, would continue for another 18mos. 2) The last major market bottom was way back in March 2009 because of the Great Financial Crisis (GFC). Millions of foreclosures/short sales, extremely high unemployment, etc. All of which persisted for several years after the market had bottomed and started to trend back up. The bounce off the March ’09 lows was like that of a rubber ball! The market tends to react to the initial problem by going down yet bouncing well before the cause of the problem has been resolved. Just the mania of markets.
Now back to the grim situation overseas. What can we do in this instance? We can pull from historical trends around the outbreak of geopolitical conflicts and what tends to happen to markets. The short answer is that the initial event is a negative, and as time passes, and there is more clarity, markets tend to turn around and start trending back up. Not in every single case, but in most. This tends to happen well before the fighting has stopped. There is an old quote that dates back to the 1800s; “Buy at the sound of cannons.” I believe the spirit of the statement is that the initial reaction of the start of a war is negative, thereby providing an opportunity to buy in at a discount.
The attached article contains a matrix of various geopolitical events and the return of the S&P 500 (one of the broadest benchmarks for US stocks); From the start of WWII to the assassination of JFK, to the Russian annexation of Crimea, and everything in between. It segments the time horizon from 1-week after the start, to 1,3,6, and 12-mos post. The data suggest that there tends to be a knee-jerk reaction to the downside in the first 3-mos, but then the returns start to skew more positive. When we get out 12-mos removed from the start, the percentage of the time the returns are positive is 83%, with the mean return being 12.3%. 
Will this time be the same? Only time will tell.
The longer I work in this business nothing ceases to amaze me. I’ve almost become numb to any/all dire or euphoric prognostications about future events. Mid-February it was virtually a 100% given that the Fed would raise rates 50Bps coming out of their next meeting on March 15-16, and there would be 6-7 more hikes between now and mid-2023…..at least this was the chatter out there on February 10th.
The Russian invasion of Ukraine started on February 24th, and with that the new chatter is we most likely see a 25Bps increase in March, and 5-6 future hikes. Once again, I see no real point for the Fed to even say things about what they could or might do that far out, because we’re now 3 weeks removed from the last Fed sound byte and we live in an entirely different world.
Hodges Investment Team
Hodges Private Client is a program offered through Hodges Capital Management, Inc. (“HCM”). HCM is an Investment Advisory Firm registered with the Securities and Exchange Commission (“SEC”), is a wholly owned subsidiary of Hodges Capital Holdings and serves as investment advisor to the Hodges Funds. HCM is affiliated with First Dallas Securities, Inc, a broker-dealer and investment advisor registered with the SEC.
This discussion is not intended to be a forecast of future events and should not be considered a recommendation to buy or sell any security. Past performance is not indicative of future results. Investing involves risk. Principal loss is possible. Investing in smaller companies involves additional risks such as limited liquidity and greater volatility. No current or prospective client should assume that information referenced in this communication is a recommendation to buy or sell any security or is a substitute for personalized investment advice from your individual advisor. HCM does not provide tax or legal advice. Consult your tax or legal advisor for any related questions.