| It feels wrong to say “Happy March” right now with what’s going on in Ukraine. It’s a surreal feeling scrolling through social media in that I am getting heartbreaking pictures and stories of the war in Ukraine, mixed in with soccer highlights, funny animal posts, and ads for whiskey (I have an eclectic mix of interests!). The humanitarian costs of the war are already horrific, and the potential for escalation is legitimately scary. It doesn’t feel right to be guffawing at videos of dogs playing video games when there is a war going on, but at the same time, we all know you can’t let what is outside your control dictate your life. Hard to find the proper balance and perspective in the chaos. Markets are just as confused right now as they try and digest an overload of macro cross-currents. Inflationary pressures and the resultant policy response from governments started us on the wrong foot this year as growth companies moved into official bear territory. There has been a flight away from growth into defensive stocks (think resources and scarcity) as markets try and guess at the speed that rates will rise. Supply is scarce, supply chain issues aren’t going away anytime soon, and demand remains strong. As economies slowly reopen after the pandemic, that demand will keep increasing. Trying to get the economic policy right is going to be very difficult. If rates tighten too quickly, it could send the economy into recession; too slowly, and you get persistent inflation. Geopolitically, I don’t even know how to quantify the risk that the Russian invasion poses to markets. It could range from a best-case diplomatic resolution sometime soon to WW3. The most likely scenario is somewhere in the middle of that. Go ahead and try and speculate how this resolves when you have someone like Putin in the mix. Your guess will be as valid as any political science expert you hear. Economically speaking, Russia and Ukraine are pretty small on a global scale. Roughly the same size economy as the state of Florida. From a purely financial standpoint, you can think of Russia as a big gas station on the world economic stage. Not relevant aside from as an energy provider and a few commodities. The humanitarian costs and impact are separate, devastating, and incalculable. The longer this persists, the higher energy costs go, the more inflationary pressure gets placed on the commodity front. Commodity markets are going crazy right now as there is fear and competition to try and lock in supply today. The global response has been in the form of severe economic sanctions. The Russian ruble and stock market have crashed, oil and commodity prices are spiking, but the global banking system is not panicking so far. Lessons learned from 2008/2009 mean more safeguards and cushions around the banking system. The real risk financially is in escalation. Amidst all the turmoil in the world, we snuck up to Whistler this past weekend for my birthday. I don’t fully understand the thinking that birthdays become less meaningful as you age. As I get older, they should take on more significance, knowing that I probably have less in front of me now than I do behind me. The older you get, the more you deserve to be celebrated! We went bobsledding on the Olympic track, which was really fast and really fun! And it turns out that bobsledding has a lot in common with investing. My kids all love how I can find investing lessons in everything we do, so I thought I would share! Bobsledding was one of the events I got a chance to watch when Vancouver hosted the Olympics. It has always been a “sport” that I have been a bit derisive towards. It is full of athletes from other sports who seem to cross over seamlessly – one minute they are a wannabe track star, the next they are somehow an Olympic bobsled medalist. “Cool Runnings” taught us that you can practice for the sport by simply sitting in a bathtub, and it comes across as just a bit more adult version of tobogganing, even when watching it live. While a lot of that may be true, it turns out that it is a lot harder than it looks. We hit just under 130 km an hour and 4Gs worth of force on our run! As you build speed and pressure, it is difficult to sit upright and not let your head get bounced back and forth, never mind paying attention to the track. Our training tips comprised of just four things – brace yourself as much as you can, never let go of the handles, don’t yell in your pilot’s ear, and most importantly, if you crash, do not try and get out of the bobsled. Trust in the safety equipment and pilot to bring you down the track. |
Investing seems pretty easy in a bull market. Pick your favourite companies and collect your profits. It becomes a bit more complicated when markets start to go haywire!
We are currently in a cycle where fear is driving markets right now. Markets hate uncertainty, which is the one thing we are wallowing in right now. Growth stocks are being dumped for commodities and defensive stocks. Companies in the utilities, resources, and real estate sectors. These are all asset classes that I put in every portfolio I build. They are not in there because I believe they will be market leaders over the next decade. They are in there as safety measures to help soften the blows of markets dropping. I wish I could say I was smart enough to time the exact moment it makes sense to switch between growth stocks and commodities and then back again, but I am not. Oil prices are always just one geopolitically important headline away from a $30 price swing. Go ahead and try and find an explanation that makes sense as to why gold didn’t jump when COVID first hit and Bitcoin did, or why gold is climbing now while Bitcoin falters! I sort of hold my nose and buy defensive stocks even though I don’t love them. They are the helmets and roll cages of portfolios. Important, but not what is going to get you down the track.
I feel horrible for short-term traders. Weighing up earnings, inflation, and employment data, trying to put a risk metric around the government finding the right balance on economic policy, and then trying to forecast what Putin does next and how it will impact global markets is impossible. You might as well ask them to give you a weather outlook for two months out.
I am happy to have commodities, real estate, and banks in the portfolios right now, but I am honestly even more pleased that I can pick up solid, growth-oriented companies at value prices. The world has a lot of problems right now. I don’t believe that gold is going to solve them. I do think that innovation and technology are going to provide solutions. Increasing oil capacity will be a temporary fix for the energy crisis; clean energy is the future. I don’t believe getting more boats floating will solve supply chain issues. Robotics and just-in-time supply management systems and innovation have a better chance of improving global efficiency in the long run.
Corporate fundamentals have taken a backseat to indiscriminate, fear-based selling. Right now, I am looking at stocks that I bought two years ago that are back trading at the same valuation today, even though their earnings and profits are 5x currently what they were back in 2019. Lost in all the noise about war and inflation and interest rates is that earnings have been strong, and the outlook for the companies we own remains promising – the reasons we bought them in the first place!
The philosopher Marcus Aurelius wrote, “Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.” History doesn’t repeat itself exactly, but it sure does rhyme! Whether it is war or COVID, the philosophy remains the same. Balance the portfolio out to try and limit the volatility but have conviction in the process of choosing quality companies with bright futures and durability to see you through to your goals.
I have no insight into how the war resolves itself. I have plenty of experience going through financial crises, and I have faith in the investment process. Brace yourself, hang on to handles. I will even let you yell in your pilot’s ear if you need to, but don’t get out of the bobsled!
Stay safe, stay positive, stay disciplined!
Jeremy
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