Mar 3, 2022
We know that many of you feel unsettled right now regarding what is happening in Eastern Europe. This is truly a humanitarian tragedy with tremendous costs to life and liberty, and we express our heartfelt support for the Ukrainian people and deepest condemnation of the current aggression by Russian leadership.
It is important to remember, that while this crisis feels like a surprise to the markets, it should be no surprise that crises do occur normally. But despite regularly occurring crises, the market does tend to move upward over time, albeit with bouts of (sometimes extreme) volatility.
The current crisis is being driven by a horrendous geopolitical conflict. However, as is usually the case, the market movement is being driven by multiple complex factors. It’s just easiest to ascribe one singular factor when trying to explain something that isn’t always perfectly explainable – such as the collective psychology of the investment market participants. A little panic is just fuel to the fire.
To mention one additional variable of significance, the massive amounts of pandemic-era support via the Fed’s asset purchases and low interest rates, along with the US Government’s direct fiscal stimulus dollars, is on the cusp of moving from a tailwind to a headwind. The party had to end at some point, and nothing ceases a market-rally-buzz worse than the whiff of rising inflation (which, by the way, is wildly transitory – please read our thoughts on inflation here).
The reality is that markets never go in one direction indefinitely. As we have communicated in the past: 10% corrections about once a year are normal; 20% corrections happen every four to five years; and 30% (or more) corrections happen about once a decade. We just don’t know for sure if the correction will be a little early or a little late based on that historic rhythm. In our current situation, we hadn’t seen a 10%+ correction since coming out of the pandemic-induced market swoon in spring 2020. Whether, when and to what extent we might be “due,” it is important to be patient as market corrections tend to recover over time.
Does this mean do nothing? Absolutely not. But what you do before the correction matters more than what you do during the correction. Planning is essential.
Having a good long-term investment strategy means expecting the unexpected. Therefore, as we reminded clients on March 11, 2020, two of the most important factors for surviving these “storms” are: 1) asset allocation; and 2) security selection. We have customized the former to the level of risk you can sustain balanced with the return needed to achieve your stated objectives. And the latter is what NPF does on your behalf every day to make sure you own high-quality businesses with conservative balance sheets (limited risk of having a cash crunch or debt problem) and have the durability to survive the regularly occurring cycles.
Combining these two factors into your strategy can help you navigate rough waters until calmer seas prevail. And they will, but you must be emotionally prepared for these occasional bumps.
We have your back every step of the way. We build portfolios with regular volatility in mind and will continue to work hard behind the scenes to tactically modify strategies as the conditions evolve – that might mean changing holdings to take advantage of new market trends or selling holdings that carry unmitigated risk with which we are uncomfortable.
Please reach out to your NPF Investment Advisor if you want to talk about this current situation or better understand your portfolio structure. Thank you for the opportunity to serve as your trusted partner.