A Word on Ukraine

Greetings,

With the situation in Ukraine now overlaying other risks already present in our financial systems, I’d like to give our perspective on possible outcomes for our clients and what we are doing to work our way through this. An outright war was almost unthinkable just a few months ago, and yet here we are. I won’t comment much on the war itself, as you are all able to read the reports as well as I can. My gut aches thinking about the fear, misery, and death that’s being inflicted on such large urban populations, and for their sake, I hope that this can end sooner than later.

Much like my comments on COVID back in early 2020, I suggest that the actions that our government and its allies take will be the major driver in how our investments fare through this. That’s not to suggest that a wider conflict would not have impacts that transcend all that we’re dealing with, but for now, the choice to impose economic sanctions, likened to economic warfare by Putin, is what will drive the numbers we read in the following weeks and months.

A quick list of the top risks to your investments:

• The US stock market is very expensive, about as expensive as it has ever been, and there are signs that investors are pulling their money out of what have been the market leaders. It’s generally following previously observed behavior occurring before a market pullback.
• Company earnings, which in many cases burst forth from the early COVID shutdowns now face tougher year-on-year comparisons, inflation, and rising interest rates.
• Consumers, who drive company earnings, are faced with inflation, rising interest rates, and fear of all the above. 
• Rising interest rates can hurt the price of bonds. They can reduce the future potential return of high growth, low-profit businesses.
• The economic sanctions will likely increase inflation and reduce consumer spending, especially in Europe, creating another risk to ongoing corporate earnings.   

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I’m sure that I missed a few, but any of these is by itself a cause for caution. On the bright side, American companies are still pushing forward out of COVID; many have aggressive hiring and expansion plans, and lots of government stimulus money remains to be spent. The dollar is strong, and the USA looks like a beacon of stability that continues to attract foreign interest and investment. 

Believing all of that, what are we doing differently? We have a process that focuses on risk management, and in general it’s a good form to stick with a process until there’s evidence that it’s not working. The good news is that it seems to be. It’s led us to own companies and asset classes with solid fundamentals and good prospects, and to buy them when they’re a good deal, sell them when they’re not, and hold them when they are working. Some experience hiccups, but most don’t, and we find that in these tough times it’s a successful strategy to protect and grow. Our bond holdings align with our thoughts on the rate markets and are characterized by low-duration, high-quality offerings. If you read Patrick’s part in recent newsletters (Q2:2021 and Q3:2021), you can get an in-depth review of our approach.   

I hope this provides a little clarity. Of course, I welcome any of your calls to discuss this and any other topic on your mind.

Best Regards,
Tim Mosier