March Madness is in full swing, and unfortunately, I’m not referring to the basketball tournament. I save a number of beginning of the year market forecasts from various analysts, and will occasionally look back on them to grade the analysts’ predictions. As I was looking through some the other day, I decided that it wasn’t very fair to grade the analysts this year. Obviously, an event like the Russian invasion of Ukraine makes a lot of the predictions moot.
Some of the fundamentals still hold true, with consumers and corporations having lots of cash, generally speaking. Unfortunately, a lot of that cash will be spent at gas pumps and grocery stores instead of restaurants and vacations. Consumers are better able to withstand higher prices in 2022 than they have been in past inflationary periods, but higher prices will likely slow the recovery for many retail and service-based companies.
The other wrench being thrown into the economic situation is how the higher price of oil and food will impact the Federal Reserve’s stance on interest rates. Higher prices should slow down economic growth, so perhaps the Fed might not be as quick to raise short-term interest rates. The Federal Open Market Committee is comprised of only a few people, so I think trying to predict their next move is not very constructive. I’d bet, though, that higher food and gas prices are factoring into their decision-making process. This could have the positive impact of keeping interest rates lower for longer. That, in turn, could lead to more economic activity down the road, as well as to higher stock prices.
The other big questions, to me, are “How long will this last?” If Russia eventually overtakes Ukraine, will sanctions continue? Will the world quit buying Russian oil forever? If so, will there be some incentives put in place for domestic oil producers to invest in increasing production? Will other oil-rich countries increase production? There are a lot of variables.
With regard to investments, we took the S&P 500’s break below its 200-day moving average as a change in trend indicator, changing from an expectation for higher stock prices to an expectation of lower prices. Further, when the S&P 500 broke below its January low of 4222, that was a confirmation of the change in trend. We are advising that investors be more cautious than usual and wait for prices to show strength before buying stocks. However, if you have a long investment horizon (more than 3 years), we believe an investor could take advantage of lower prices and “buy the dips,” adding money into stocks on down days.
There are some scenarios, of course, in which this war expands and prolongs. However, I don’t think that is the base case. It will likely end pretty quickly, all things considered, and the U.S. economy will likely be pretty insulated from it. Historically speaking, stock price dips due to war have been good long-term buying opportunities, although each situation is different due to the many other factors that go into stock prices. So, again, for long-term investors, take advantage of the lower prices. If you’re concerned about shorter-term portfolio fluctuations, though, we advise caution.
Charlie Munger, the 98-year-old vice chairman of Berkshire Hathaway and Warren Buffett’s partner, recently said, “If you’re going to invest in stocks for the long term or real estate, of course there are going to be periods when there’s a lot of agony and other periods when there’s a boom,” the 98-year-old billionaire said. “And I think you just have to learn to live through them.”
Munger cited the poem “If—” by Nobel Prize-winning writer Rudyard Kipling to highlight his point.
“As Kipling said, treat those two imposters just the same,” Munger continued. “You have to deal with daylight and night. Does that bother you very much? No. Sometimes it’s night and sometimes it’s daylight. Sometimes it’s a boom. Sometimes it’s a bust. I believe in doing as well as you can and keep going as long as they let you.” Munger on market swings: ‘As Kipling said, treat those two imposters just the same’ (yahoo.com)
As stock investors, we must remember that we cannot control the booms and busts. We must learn to live with them-and ourselves- if we are going to pursue high returns on our money.
April 18 is fast-approaching; that’s the deadline to file your tax return in 2022. That means that if you are going to contribute to an IRA, a Roth-IRA, or a SEP-IRA, you should be preparing to do that. Also, if you’re over 72, take the required minimum distributions (RMDs) from your IRAs and qualified plans. You must begin RMDs by April 1 the year after you turn 72. Subsequent distributions must be taken by Dec. 31 each year. That means if you reached 72 during 2021, and you delayed your 2021 initial RMD until April 1, 2022, you still have to take your 2022 RMD before Dec. 31, 2022. For more information, go to irs.gov/rmd.