Ukraine crisis upends investing playbook for 2022
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6 min read . Updated: 27 Feb 2022, 06:06 PM IST - Markets from wheat to oil and stocks are recording some of their most extreme swings of the past two decades
Global markets for everything from stocks to oil to wheat are recording some of the most extreme price swings in decades, a sign of investor unease over unpredictable economic and political dynamics.
After months of turmoil driven by the prospect of tighter Federal Reserve policy, investors this past week confronted a fresh challenge when Russia invaded Ukraine. The geopolitical crisis threatens to crimp economic growth in Europe at a time when inflation is at a 40-year high and the Fed is poised to raise interest rates for the first time since 2018.
The S&P 500 suffered its first correction—a drop of more than 10% from a recent high—in two years, while Russian stocks recorded a historic crash, dropping by a third. Oil prices crossed $100 for the first time since 2014, and wheat hit the highest level since 2012. Commodities like nickel and aluminum soared as well.
The attack is “creating chaos in the financial markets," said Ilya Feygin, a managing director at New York-based brokerage firm WallachBeth Capital.
Yet as U.S. stock indexes touched their lows of the week Thursday morning, a familiar pattern began to reassert itself. Many investors jumped back into the market, scooping up shares of the growth and speculative stocks that fell out of favor this year. Oil and other commodity prices eased off their highs. By the time Friday’s closing bell rang, the technology-focused Nasdaq Composite and the broader S&P 500 were up for the week.
The S&P 500 eked out a 0.8% gain after falling as much as 5.4% during the week, the biggest weekly comeback since September 2008.
The U-turn emphasizes that many investors are loath to dump the trades that boomed over the past two years, and it highlights a dilemma they now face. They can opt to stick with investments in slower-growing companies that appear likely to weather what could be a bruising interest-rate cycle. Or, they can return to the pandemic-era winners whose returns exceeded all expectations and that continue to prosper at times, despite concerns about high valuations and mixed fundamentals.
Even in light of the impressive comeback in the second half of the week, some stark facts remain. The Nasdaq is down 12% in 2022; the S&P 500 is off 8%. Investors continue to expect the Fed to raise rates starting in March—a process that is likely to be painful for some highly valued investments. This week, investors will be looking at the monthly jobs report and earnings from companies like BJs Wholesale Club Holdings Inc. and Domino’s Pizza Inc. to gauge the market’s trajectory.
Several investors said they are questioning whether major indexes have fallen too far, too fast and whether the trades that soured over the past two months are bound for a comeback. By one measure, valuations for S&P 500 stocks fell below their five-year average for the first time since 2020, according to FactSet.
“Investors are looking at equity market valuations and starting to reassess, particularly bottomed-out areas of the markets," said Erik Knutzen, multiasset class chief investment officer at Neuberger Berman.
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Some of the stocks that had declined the most this year led the rally to end the week. Stocks within the Russell 3000 that had performed the worst so far in 2022 bounced the most on Thursday, gaining around 7%, according to Bespoke Investment Group analysts.
Some of the most speculative corners of the market notched big gains, too. Shares of Cathie Wood’s flagship fund, the ARK Innovation ETF, added 4.7% for the week. The S&P 500’s technology sector outperformed the broader market, and shares of some growth companies bounced back.
Individual and institutional investors jumped into the market. Of the $3.6 billion that investors poured into U.S. equity ETFs this week, around a fifth went to the ProShares UltraPro QQQ, which provides turbocharged exposure to the Nasdaq, FactSet data through Thursday show.
David Giroux, portfolio manager at T. Rowe Price, said he has already sold shares of energy companies in his portfolio—which have outperformed this year—while buying tech stocks like Nvidia Corp., Apple Inc. and Amazon.com Inc.
He said he expects oil prices to fall and inflation to moderate over the coming year while economic growth slows down, helping tech stocks. He predicts major indexes can still notch gains for the year, recovering their steep losses.
“We have really fundamentally changed" our portfolio, Mr. Giroux said. “A year ago you would’ve seen a big bet on value [stocks]. Now everybody loves that stuff—we’ve been selling that hand over fist."
Adding fuel to the bets, traders started to price in a lower chance of a half-percentage-point increase in interest rates in March, with some banking on the geopolitical tensions to soften the magnitude of Federal Reserve’s action.
The recent volatility has tested investors after a prolonged period of calm. Following a sharp, swift fall into a bear market in early 2020, stocks primarily went up for most of the next two years, kicking off 2022 at fresh highs.
The recent selloff—with the S&P 500 down 8.6% from its highs—has lasted 37 trading days, compared with the 23 trading days it took for the gauge to bottom in early 2020, according to Dow Jones Market Data.
And many warn that the swings may be far from over. The outcome of the war between Russia and Ukraine is unclear, and many investors remain on edge about rising interest rates. Though stock valuations have fallen, they remain above historical levels.
Under the stock market’s surface, the turmoil is more apparent. Around 67% of stocks in the Nasdaq and 29% of stocks in the S&P 500 are down at least 20% from their highs, according to Dow Jones Market Data.
Despite the turbulence, many investors have kept stepping in to buy, looking for opportunities to scoop up beaten-down stocks. That has led to some of the biggest intraday reversals of the past 15 years in the first weeks of 2022. On Thursday, the Nasdaq was down more than 3% intraday and ended the session up by roughly the same amount, something that hasn’t happened since 2008, during the depths of the global financial crisis.
On Thursday and Friday, some traders appeared to be locking in profits on bearish trades that they had placed earlier, rather than loading up on stock insurance that would protect against a continued downturn, analysts said.
“You can see that people are just waiting to buy this dip because no one thinks it’s going to last forever," said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management. It could “end in two weeks or it’s going to end in two months, but it’s going to end."
Mr. Ren said he put on a bullish options trade on stocks on Thursday.
“When there’s panic in the market, it pays to take some profit very quickly," Mr. Ren said.
This story has been published from a wire agency feed without modifications to the text
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