The Right Stocks Will Do Well Over The Long Term
I believe that being in the right stocks will do well over the long term, but you may be thinking it is different this time because now Russia has invaded Ukraine and the recovery will take a long time. Here are some examples. I am not going to compare this current war with the attack on Pearl Harbor in 1941, but even with that magnitude it only took 307 days to get back to break even back then. 32 years ago, with Iraq’s invasion of Kuwait that took 189 days. In 1968 there was a major escalation during the Vietnam War called the Tet Offensive and after that major advancement it was only 65 days before the markets were back to break even. Finally, I was surprised because I believe it is more devastating than 9/11 only took 31 days to get back to break even. Don’t try and time these market headwinds as you can get caught on the wrong side very quickly.
US Electric Grid
The United States electric grid is becoming older by the day. In 2020 there were over 180 power disruptions. Just 20 years ago there was only roughly 24. A report that came out last year from the American Society of civil engineers found that 70% of transmission and distribution lines are passed the second half of their 50-year life span. The society of engineers also anticipate by 2029 the US will have a shortfall of $200 billion in funding to improve the grid and meet renewable energy goals. All this comes on top of the increased need and use for electricity. Be prepared for more outages as we move forward. I feel this is such an embarrassment for a country like United States that is so strong with so many natural resources that we would have any power outages.
February Jobs Report
The Russia/Ukraine news continued to dominate the markets and what was for the most part a strong jobs report flew under the radar. Nonfarm payrolls saw an increase of 678,000 in February which easily topped the estimate of 440,000 as jobs continued to be recouped from Covid. The two previous also saw positive revisions as a net 92,000 jobs were added to the two reports. The sector seeing the biggest benefit continued to be leisure and hospitality which added 179,000 jobs. Other areas of strength included professional and business services which grew by 95,000, healthcare and social assistance was up 94,000, construction added 60,000, and transportation and warehousing increased 48,000. The leisure and hospitality sector still remains 9% or 1.5 million jobs below where it was at in February 2020. Overall nonfarm payrolls are still down 2.1 million jobs or 1.4% compared to February 2020. Other positives included the unemployment rate which stood at 3.8% and the labor force participation rate rose to 62.3%, which still stood 1.1 percentage points below the February 2020 level. Wage inflation of 5.1% for the year may sound like a positive, but remember CPI grew 7.5% in January which means consumers are still losing purchasing power. I’m still sticking with my estimate that 2022 will be a fine year for both the economy and the right stocks.
Russia-Ukraine
No one knows for sure which direction the Russia invasion of Ukraine will go. I have talked in the past about how they have become closer with China, but this attack on Ukraine could dampen that relationship. Russia is trying to disrupt the ports so that Ukraine will be hurt financially because they cannot export their products such as grain, corn, barley, and sunflower oil. Here in the US that is not a problem, but the Chinese do obtain these products from Ukraine. It is also a very difficult time for China because their pork producers have been losing money as hog prices drop and now it’ll make it difficult to get corn adding more pressure on Chinese pork producers. Perhaps this could force Russia to back off on their invasion.
Oil & Cryptocurrency
I don’t always agree with Justin Trudeau, the Prime Minister in Canada, but I do applaud his decision to ban Russian oil imports. This is the best way to hurt Russia as it is estimated by the Wall Street Journal that the country is receiving $650 million/day from energy exports. For a country that has a GDP of around $1.5 trillion and saw oil and natural gas sales in 2021 account for 36% of the country’s total budget it is easy to see where their strength lies. Other countries banning Russian oil imports would cause a continued spike in oil prices as Russia occupies about 11% of the global production, but I believe this is the best way to harm Russia. Another area that I am concerned is benefitting the country is Bitcoin and cryptocurrencies. With countries around the world placing financial sanctions on Russia and freezing assets the Russian Ruble has fallen tremendously. At the beginning of February 1 Russian Ruble would be worth $0.013 and today that has fallen more than 50% and 1 Russian Ruble would now be worth just $0.0086. With the currency faltering and assets frozen I worry that crypto is one of the only places Russia can turn and that the recent increase in price is benefitting them. In the past we discussed how ISIS benefitted from Bitcoin and now I would not be surprised if Russia is a major benefactor. This is of course just one reason amongst many others that I am not a fan of Bitcoin and other cryptocurrencies.
Stock Market
You may think our stock market has been hurt by the Russia invasion, but it appears that they shot themselves in the foot. Since the beginning of the year, the iShares MSCI Russia ETF and VanEck Russia ETF are down more than 65%. Compared to their October highs the ETFs are down nearly 75%. I’m sure their president has his eye on that.
Rising Energy Costs
Once again, we have seen prices at the pump increase, but it appears that we could be topping out. Of the most bullish calls on Wall Street, JP Morgan Chase’s call of $150 per barrel has been dropped to $110. Rising energy costs do take money out of consumer discretionary spending, it’s approximately 0.2% for every 10% increase in energy. With a minor impact and all the cash in the economy I do not see a recession arriving in 2022. Hence no reason to sell good quality equities this year. I know we are all feeling the rising cost of energy prices, but I think it is worth noting that today it is only absorbing about 3.3% of consumer spending compared with 20 years ago the cost of energy was taking 5.3% away from consumer spending.
Cash Businesses and Consumers
We have talked many times about how flush with cash businesses and consumers are. A good example of this is in the last quarter of 2021, $86 billion of stock was bought back by the 10 biggest S&P 500 companies which was 30% higher than the prior year.
Long-Term Investment
What is the difference between a smart man and a wise man? A smart man THINKS he can predict what direction the stock market will go in the near future. A wise man realizes he cannot predict the future of the stock market and therefore makes better long-term investment decisions.