I expect for the FED to continue to raise the FED Fund, but at much smaller increments. The 10-year bond is now back up to 3.79%. Next week the topic will be how ESG can help reduce many risks we are facing.
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Want more on “How War Affects the Modern Stock Markets? War and Stocks
While the overall economic risk rating worsened in only nine countries in 2022 over 2021, divisions within countries and regions continued to widen, fueling social unrest and terrorist threats. It is not clear whether the ongoing recovery from the pandemic’s economic damage will have enough traction to pull many countries out of their economic distress.”
This Week’s Thoughts is rather long, but it is devoted to an email I received from a long-time client who wrote to ask how terrorism and escalating wars could impact financial assets. More than that, he wanted to know how to protect our portfolios. Below is his email and I suspect that every one of you has been thinking about this, as well. After a year of the images coming from Ukraine, we are numb, war weary and quite frankly, we don’t know when it will end.
“I would like to talk about my portfolio and how my investments are positioned in regard to world events. My concern has to do with our dysfunctional government and events in Europe and Asia. China has built up their military, preparing for war and will not back down on Taiwan and the South China Sea. Russia is at war, and it will escalate as the US and Europe cannot allow losing Ukraine to Russia aggression. China is propping up the Russian economy and building new military alliances. Iran and Syria are forming stronger alliances because Syria needs Iran for economic and military support. Iran is gaining power in Syria. Iran is very close to having the ability to launch a nuclear attack on Israel and the US has just strengthened our military collaboration in preparation of an attack on Iranian nuclear facilities. With Netanyahu in office, I think it will happen sooner than later. North Korea has the ability to launch nuclear warheads at the US. I could go on. These are serious events, and I don’t want to be complacent. It’s a ticking time bomb and the US government has enabled China to be a Superpower and now they are our biggest adversary. While we argue about bathrooms, China has been laser focused on world dominance. I don’t feel this is an overreaction. I want to be forward looking, not looking back saying I should have been proactive. Do you have a plan for making money when Europe is burning? This may mean changing my Social Governance profile.”
Why does it matter to you? My first thought was that there were many risks he left out of his email that I actually rank much higher on my “Big 10 List.” Regarding war, it has been my experience that no matter how much I abhor it, rarely does it impact financial markets for very long. Are we facing more threats today than in past years? Could stock and bond markets PERMANENTLY collapse under the weight of global events?
While this ever-present fear may run in the background, like a computer virus…it seems every time the stock market is down like it is today, we fear that this time it will not recover. So, today…should we change how we are investing?
Let’s look back to 1941…and what most Americans consider to be one of the most horrendous events in modern American history: the attack on Pearl Harbor. Scan the table below, back over the decades: how many of these events, and the market response, do you remember? I suspect that you probably cannot even remember most of these, today.
No matter what we endured at the time, markets always recovered: look at right column… “Calendar Days to Recovery.” Does it surprise you how quickly the market rebounded? I am sad to say, the market simply does not care about the atrocities of war.
Ok, now let’s get some perspective on other geopolitical risks. Click this link: Political Risk Report 2022 and then go to the dropdown menu under “Interactive Map” and select one of the global risks:
· War & Civil War
· Strikes, Riots & Civil Commotion
· Terrorism
· War & Civil War
· Country Economic Risk
· Currency Inconvertibility & Transfer Risk
· Sovereign Credit Risk.
If you look at each type of risk, you will see there are a handful of countries at the “nexus” and they carry a level of risk that I feel is simply not worth taking. The key is always to identify the risks and decide whether you want to take that risk, as we did in the summer of 2021 when we divested out of China, Russia, and Saudi Arabia.
Why does it matter to you? This discussion is not really about the numbers…about there being some analysis that will convince us everything will be OK. This is not about telling our head there is nothing to worry about: this is about how we live our lives in the midst of what seems to be an overwhelming pressure that has been building for years.
I suspect that what we worry about most, is that this time it will be different, and the market won’t rebound. This is totally understandable as our portfolios help keep the lights on. No matter how rational or irrational it is, we simply must find a way to reason our way through it.
At the end of the day, we all have to decide how much information we “can take” and where we will get it from. There are many news outlets that intentionally use fear to get you to tune in: avoid networks if you find you feel anxious when the news is over. PBS is well respected for being pragmatic, rational, and focused on the news of the day. Bloomberg TV is good if you want more financial news without any spin. Information is like sunshine: it is the best solution for dispelling fear.
And know…these are extremely difficult times: these last 4 years have been like having a vice grip continuously tightening on our heads. It is completely expected to feel our anxiety level rising! However, if you do find worrying is negatively impacting your life, or you have a foreboding sense of doom, please talk to me, and share how you are feeling.
Next week we’ll be looking at how ESG can, and has, helped manage many types of risk with a goal of sleeping at night.
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