In America, we woke yesterday to hear news of Russia invading Ukraine. Tensions had been building in eastern Europe for several weeks as Russia began to amass troops on their western border with Ukraine. In addition to rising interest rates, this development had been contributing to the uncertainty which was affecting investors.
As a result, stocks opened sharply down but ultimately recovered and actually finished positive for the day. The Dow Jones Industrial Average of 30 large U.S. stocks was down over 800 points in the morning but managed to finish almost 100 points higher on the day. Large-cap growth stocks (think technology companies), which had been struggling all year, shot up over 3% on the day, while value stocks (like energy and financial companies) which had been performing relatively well this year, finished down for the day. Quite a reversal of fortunes for those two areas of the market.
As you are well aware, we have been raising cash for the past month as our holdings began to trip through the FSA Safety Nets®. FSA accounts were roughly 50% in money markets heading into the market open on Thursday, so we clearly had moved out of deep waters and pretty close to shore. The chart below shows the support we had been watching which would trigger us to sell many of the remaining funds that we hold. It is a chart of the S&P 500 Index (yellow line) with two red lines marking the zone of support that would decide if we held or sold many of our remaining large-cap U.S. funds. The sharp drop in stock prices yesterday morning broke that support, which led us to raise additional cash in Conservative Growth and Core Equity. Since stocks recovered in the afternoon, we did not trade all of the strategies and even reduced the amount of trading that had been planned in the morning.
The table below shows the allocations of the various FSA strategies as of the market’s close on Thursday:
With inflation and interest rates on the rise and political tensions elevated due to the war in Ukraine, stock and bond investors are currently on edge. As a result, holding a sizable cash component is prudent at this juncture. Nevertheless, there are areas of both the stock and bond markets that have been resilient thus far, and we may hold small allocations to some of those areas as long as they remain resilient. Rest assured that we have the FSA Safety Nets® in place for these positions, as well.
From a fundamental perspective, there are reasons to be optimistic as we move through the year, including:
- Large reduction in COVID cases
- Strong economic growth globally
- Solid corporate profits
This will no doubt create a tug of war between the bulls and bears in the short run.
As always, we will let market prices give us the signals that it is time to wade deeper back into the waters (or conversely, to get all the way to the beach).
Your Portfolio Management Team
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