What To Do When The Market Appears Unstable ? -

• A lot of people will overreact during market corrections for one simple reason – they don’t have a plan in place.
• Always tell people that the worst time to discover your risk profile is when you can’t afford to discover it.
  
• We all want the perfect portfolio. That’s the portfolio that captures all the upside and none of the downside. >> News flash – that thing doesn’t exist.
  

Markets went heavily down (correction or bear market ?)  late January. They are not catastrophic numbers, but they are fairly sizable given that we are only in the beginning of the year 2022.

At this falling rate, the Nasdaq will be at $0 by July. Just kidding. That is not how that works. But still, it is an uncomfortable environment. So what should we do? Here’s a quick check list followed by some tips to identify whether we are in a correction or a bear market:

1. Revisit your financial plan and goals.

 
A lot of people will overreact during market corrections for one simple reason – they don’t have a plan in place. All asset allocation should start with a simple financial plan so you create goals and time horizons for specific assets.

For the the average investor we would advise of simple bucketing strategies using ETFs because they create behaviorally robust and streamlined asset/liability matching portfolios.

What that means in short is, you want to have specific buckets for specific time horizons to match your future liabilities. For instance, everyone needs a liquidity bucket for emergencies, home down payment, etc. And everyone has medium-term liabilities for more uncertain future liabilities like kids tuition, car purchases, etc. And then we all have long-term buckets like retirement and long-term health needs. Creating time horizons for your assets will help you stomach the probability that that asset will be there in full when you need it to be there.

At any rate, you need to establish a plan and the worst time to establish your plan is after the market falls and you realize you needed the plan years ago.

2. Revisit your max pain point. 

The worst time to discover your risk profile is when you can’t afford to discover it. This too often happens when the market is spiraling lower and people panic. People move to cash because cash makes the pain stop. If you don’t know your risk profile the market will teach it to you. Do not wait for that moment. Instead, assess your max pain point before you get there.

The best way to do this is to ask yourself how you’d feel if your portfolio fell 20% over the course of a calendar year. And then assume it’s going to fall another 20% the following calendar year.

At this point, your portfolio is down 36% so you need to ask yourself how you’ll feel when it falls another 20% in year 3. This brings you to a total drawdown of 49%. This is essentially what happened in the 1970s and early 2000s. It’s not unheard of by any means even though it is a distant memory.

In a raging bull market like the last 10+ years, it’s easy to forget what a horrible grinding bear market really feels like. They’re scary as hell and they’re a perfectly normal part of the market cycle. But it won’t feel normal when it’s happening.

Now, everyone knows how to answer the question “what do you do in this environment?” Everyone says buy more or sit tight. But when you’re in the throes of that 49% downturn you will, with near certainty, question every emotion you’re having. You will, with certainty, say “what if it’s different this time”. And you will be tempted to sell to make the pain stop.

Do this exercise now. Put yourself in those emotions now so you don’t discover them later.

3. Remember that perfect is the enemy of the good. 

 
We all want the perfect portfolio. That’s the portfolio that captures all the upside and none of the downside. News flash – that thing doesn’t exist. And no matter how much you look for it you will just waste money on taxes and fees the harder you try.

It’s in moments like this where you need to go through exercises #1 and #2 and then accept that your plan doesn’t need to be perfect. The appropriate portfolio that you can stick with will outperform the optimal portfolio you can’t stick with.

You aren’t going to capture all the upside with all the downside protection of cash. Everyone wants to hate on bonds and cash in an environment like today. But that’s mainly because they’ve forgotten what it feels like when stocks go down for multiple years in a row (something bonds and cash do not do).

The point is, implement the portfolio you need, not the portfolio you want. By setting realistic expectations and implementing the portfolio you need you will likely give up a lot of potential upside while implementing a portfolio that is behaviorally robust and therefore likely to perform better than the counterfactual where you chase the returns without knowing you are chasing risk.

4. Talk about it. 

People don’t like to talk about money. Or, they like to talk about money when things are good, but hate to talk about money when things are bad. Own your mistakes. Talk about them. Learn from them.

There’s nothing wrong with talking about your mistakes, getting second opinions and having an open discourse about how you are feeling and what you are doing. It’s all part of the process of learning to deal with the emotional rollercoaster of the markets.

That is wise to complete your experience and reasoning by questioning professionals in whom you trust and check with him (them) the optimal solution for you (as everyone has  different needs and risk levels). 

At Investlogic we are happy to help you to find the best solution FOR YOURSELF !

 

Super Bubble and Bear Markets


JEREMY GRANTHAM  previously posted the following chart of 40-years of market bubbles. During the inflation phase, each got rationalized that “this time is different.”

Grantham believes that exuberant investor psychology leads to a “blow-off” phase in financial markets. To wit:

“The penultimate phase of major bubbles is characterized by a “blow-off” which is an accelerating rate of stock price growth to two or three times the average of the preceding bull market. This pattern shows as clearly as any of history’s other great superbubbles in 2020 (see  below Exhibit 4).”

Grantham who has been bearish for months did not hesitate to announce couple of days ago that the SUPERBUBBLE had just exploded… And that the loss of capital that will follow could reach 35’000 billions – We don’t even know what that means. He thinks that the irrational behavior of many investors will lead to a total collapse in all asset classes… the possibility of a 40-50% contraction to revert the massive extension from the long-term growth trend is highly.

The two most important levels for market watchers, given Grantham’s view of a “mean reverting event,” are the 38.2% and 50% retracement levels. The 38.2% level intersects the running support trendline from 2009. The 50% retracement level aligns with the lows from 2018 and March 2020.

Should those two support levels fail, the market will likely search for a bottom at the 61.8% retracement level at the 2015-2016 lows.

That can’t happen, you say? 

A Bear Market Anatomy

There are three principal phases of a bull market: the first is represented by reviving confidence in the future of business; the second is the response of stock prices to the known improvement in corporate earnings, and the third is the period when speculation is rampant - a period when stocks are advanced on hopes and expectations. 

There are three principal phases of a bear market: the first represents the abandonment of the hopes upon which stocks were purchased at inflated prices; the second reflects selling due to decreased business and earnings, and the third is caused by distress selling of sound securities, regardless of their value, by those who must find a cash market for at least a portion of their assets.
- Robert Rhea, The Dow Theory, 1932

 

What Defines A Bear Market

To answer that question, let’s agree on a basic definition.

• A bull market is when the price of the market is trending higher over a long-term period.
• A bear market is when the previous postive-trend breaks, and prices trend lower.

The chart below provides a visual of the distinction. When looking at price “trends,” the difference becomes apparent and valuable.

The distinction is also essential to understanding the difference between “corrections” and “bear markets”.

“Corrections” generally occur over short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.

“Bear Markets” tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.

The price decline in March 2020 was unusually swift using monthly closing data. However, that decline did not break the long-term bullish trend and quickly reversed to new highs, suggesting it was a “correction.”

Given the already large deviations from the trend in 2020, it required more than a 20% decline to retest the trend. If you review the chart above, the subsequent retest of the bullish trend will require something substantially larger in magnitude.

We are here to accompany you along the way.

Stay tuned

 

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The Federal Reserve Doesn’t Care About the Stock Market

Imagine the following scenario: Termites are eating the foundation of your house. You call a pest control company for a cost estimate to get rid of them. After a thorough assessment, they report the following:

“There is bad news and good news. The bad news is, solving the problem will cost $10,000. The good news is, things could have been much worse. If you wait another six months, it will cost you $50,000.”

In our metaphor, Federal Reserve Chair Jerome Powell is the homeowner. The house is the U.S. economy, and the termites are inflation.

The point of the metaphor is that the Federal Reserve has run out of choices. If termites (inflation) continue to gnaw at the foundation of the house (the U.S. economy), the house will eventually collapse.

The Federal Reserve has to stop this from happening, no matter what. That is its most important job.

And if the stock market is hurt by the Federal Reserve’s actions, the Fed won’t care. Addressing the inflation problem is simply too important

The Fed Never Cared About the Stock Market (Not Directly, Anyway)
The Federal Reserve never cared about the stock market anyway — or not directly, at least. The notion it ever did was a myth.

The Federal Reserve officially has something called a “dual mandate.” The twin pillars of the dual mandate are stable prices and maximum employment.

This means that, first and foremost, the Fed is tasked with keeping inflation in check. It is also responsible for keeping the economy healthy.

Along with stable prices and maximum employment, the Federal Reserve cares about political optics because it wants to maintain independence.

The Federal Reserve knows that if politicians in Washington get angry enough, Congress could vote to curtail or even revoke the Fed’s independence. The Fed doesn’t want that to happen, which is why it stays attuned to politics.

Based on its historic pattern of actions, and the way the stock market has responded positively to every rescue effort, it certainly looks like the Fed cares directly about the stock market. But this is an optical illusion that arises from acting on other concerns.

For example: If the banking system collapses or the corporate debt market freezes up, millions of jobs would be lost.This is why, when a financial crisis unfolds, the Fed steps in with liquidity and credit market support. That support winds up helping the stock market — but the stock market gains are a secondary effect.

Then, too, in the aftermath of the 2008 financial crisis, the U.S. economic recovery stayed subpar and sluggish for years.

The Fed introduced quantitative easing (QE) in that environment to try and create a “wealth effect” — a theory that rising asset prices would make consumers feel more confident and thus more willing to spend and contribute to economic growth.

The key thing to know is that supporting the stock market has never been a direct concern. Investors have just gotten used to thinking that way, because every time the Fed responds to a crisis, its actions tend to support asset prices.

The Federal Reserve today is no friend to the stock market. One might even consider it an enemy. Why?

Because in 2022, fighting inflation is the Fed’s No. 1 concern. That means tightening up monetary conditions and hiking interest rates. The market is pricing in at least four rate hikes over the next year or so, and it remains entirely possible there could be more.

If it sounds strange to think of the Fed as the enemy of the stock market, that is just because we are used to recent history. Think of the Federal Reserve under Fed Chair Paul Volcker in the late 1970s and early 1980s.

Volcker was so determined to beat inflation, he was willing to trigger a brutal recession (via sky-high interest rates) to achieve his goal. Today’s Federal Reserve isn’t likely to go as far as the Volcker Fed, but nor does it have to.

Speaking of recessions: Some will argue that if the stock market goes down in value too much, the Fed will have to step in because a weak stock market threatens the economy.

That might have been true in the 2010s — the decade that followed the financial crisis — because the economy was weak and sluggish. But today the unemployment rate is 3.9%, which is historically quite low, and there are credible arguments that the U.S. labor market is the tightest it’s been since the 1950s.

Then, too, not only is the U.S. growth picture robust in 2022, but one could argue that demand is too robust relative to the output capacity of the U.S. economy itself.

Consumers are so flush with cash, they are buying more goods than ever before, and it is largely the force of this demand that is straining supply chains and pushing prices up.

At the same time, the Fed is worried about inflation expectations becoming entrenched. With inflation readings at 40-year highs, it is not just the inflation itself that poses a problem. It is the risk that an inflationary mindset gets embedded in the public consciousness.

If the stock market falls hard against a backdrop like this, it won’t necessarily hurt the U.S. economy. Stock valuations in some corners of the market were looking highly inflated, the strongest companies have plenty of cash on the books, and housing demand and labor demand look rock-solid.

In fact, companies with excessive valuations (meaning extraordinarily high price-to-earnings or price-to-sales ratios) can see their share prices fall a long way before day-to-day business is impacted.

The nosebleed valuations in many areas of the stock market right now — particularly the tech sector — further explain why the stock market is so vulnerable to an extended correction, or even a multiyear bear market decline


Strong Banks and Balance Sheets Mean No Financial Crisis on Dec

 
What about the possibility of a new financial crisis if the Fed hikes interest rates too much? Some argue the Fed will have to be careful to avoid this risk, and that financial crisis dangers will limit the number of hikes they can push through.

Except this argument doesn’t hold up either, because the banks are in great shape today.

After the financial crisis of 2008, the banking system was battered and bruised, having barely survived a near-death experience. But in 2022, the banks are robustly profitable with solid balance sheets.

Not only that, but the banking sector actually likes it when interest rates go up, because higher interest rates at the long end of the curve means fatter profit margins on lending activity.

This is why, thus far in 2022, there is little surprise that financials are the No. 2 best-performing sector in the S&P 500. (No. 1 is energy, which is no surprise either, with oil on its way to $100 per barrel.)

It is also no surprise that, according to Bespoke Investment Group, the Nasdaq — which officially entered 10% correction territory as of the Jan. 19 close — is having its fourth-worst start to a year in history. Most of the extreme froth that built up in markets over the past two years was concentrated in tech stocks.
To sum up, the Federal Reserve doesn’t care about the stock market, and it never did.

This is important to understand because far too many investors still think the Fed will save them — or that Powell cares about saving them — in the event their favorite stocks continue to fall.

In reality, the Federal Reserve engages in stimulative rescue-type actions when the U.S. economy is weak or sluggish, or when a financial crisis in the corporate sector or the banking system looks imminent.

Those conditions do not apply today.

Instead we have inflation read-outs at 40-year highs, wage pressures across the full spectrum of income levels, an oil price heading for $100 per barrel, and a Federal Reserve worried about the pain of waiting too much longer to act.

If you put all those factors together — along with the fact that the market itself is signaling at least four rate hikes in 2022 — you get a picture in which the Fed is prepared to fight inflation aggressively, even if its extended rate hike campaign winds up hurting the stock market.

Until and unless a new financial crisis percolates or the threat of a new downturn or recession looms — and remember, the banks look fine right now, and unemployment is historically low at 3.9% — the Fed

simply won’t care about valuations falling back to earth, or the Nasdaq following its correction path deep into bear market territory.

2021 Review of the Russian Economy and Equity Markets

For the Russian market, the end of 2021 saw the outflow of foreign investors’ monetary assets and an accelerated fall of the key indices, against the backdrop of foreign policy tensions and mixed signals from international stock exchanges. Talks about Russia's conflict of Ukraine, aggressive rhetoric between Russia and the West and the risk of imposing a new set of sanctions played a determining role. Geopolitical risks and the toughening tone of Western countries towards Russia make investors forget about external factors for the time being. 

The pandemic, and in particular the emergence of the Omicron variant of Covid-19, also continues to have a significant impact on the dynamics of both the global and Russian markets. Additionally, the suspension of trade for Rusnano bonds caused uncertainty and alarm for the whole Russian market.

 

 

One of the results of the year was the withdrawal of $220 million of foreign assets from Russian stocks - a record amount since April 2020. However, this behavior went beyond the Russian market. International investors sold assets in almost all emerging markets, fearing a tightening of the U.S. Federal Reserve's policy, with investors transferring money into shares of U.S. companies as a result. Ahead of the last Fed meeting in 2021, Fed Chairman Jerome Powell sharply tightened his rhetoric, abandoning the term “transitory inflation,” and the Fed’s last meeting suggested three rate hikes are possible in 2022. Global investors reassessed risk and hedged in response, and as a result, cash flows are shifting from emerging markets to the more solid and crisis-resilient developed markets. According to EPFR, developed markets funds raised nearly $34 billion month-to-date by mid-December.

Highlights

September was the best month for the Moscow Exchange this year, as the index rose to new  historical highs through most of the month, peaking near the end of September. However, Russian indices noticeably declined toward the end of the year amid high inflation and negative expectations from the Central Bank policy. In mid-December, for the first time since April 2021, the MOEX Russia Index dropped to 3,532.29 points, though it then was able to recoup most of its losses. However, experts believe that the decline is primarily due to foreign investors, as Russian investors have long been accustomed to geopolitical tensions, sanctions, rhetoric and other factors that discourage foreign capital. Russian investors know the situation from the inside, they are less susceptible to panic: they observe the growth of dividend yields and plan their buys.

The emergence of the Omicron coronavirus variant, as well as news of its rapid spreading, and the accompanying increase in global inflation, have all had an adverse effect on the dynamics of the Russian market. A series of new lockdowns in European countries also greatly affects the situation with stocks in Russia. The U.S. market, however, has taken the corona news from Europe in stride, and there also have not been new lockdowns in the U.S.

At the same time, due to the black swan in the form of a pandemic, a liquidity overhang has been created, with states having to spend significant funds to combat the spread of the virus, and to treat and vaccinate the population. These costs have contributed to inflation. Economic stagnation and pressure on small and medium-sized businesses have led to a significant decline in GDP growth in Russia. It will take time to restore the normal functioning of economic processes and the labor market.

Towards the end of the year, the Central Bank of Russia decided to raise its key rate to 8.5%. This step was not a surprise, especially since the regulator itself had warned about the increase in advance. The reason for such a step was inflation, which exceeded the Bank of Russia’s expectations. The Central Bank expects that this increase of the key interest rate will help slow down the rate of price growth and return inflation to the earlier targeted level of 4% by the end of 2022. The regulator does not rule out that it will need to raise the rate again in the future.

As for the performance of specific companies, VK Company (MCX:VKCODR) (Mail.ru), Petropavlovsk PLC (MCX:POGR) and X5 Retail Group NV (MCX:FIVEDR) are among this year's biggest losers. VK (Mail.ru) is down 40% since the beginning of the year, a record drop among all stocks in the index. Its shares continue to drop past historical lows, trading already below 1,200 rubles. Experts link this trend to the fact that the billionaire Alisher Usmanov sold his stake in VK, followed by Gazprombank buying in and then transferring its stake in VK to Gazprom-Media Holding.

Gold miner Petropavlovsk's shares have fallen 33% since the beginning of the year. In the first half of the year the shares were pressured by the corporate conflict of owners and reduction of production capacities.
Shares of the leading retailer X5 Group also failed to please investors this year, one in which shares dropped 25% from levels seen 18 months ago. The impact of inflation is evident here, as price pressure in the economy led to a widespread rise in the cost of goods and services, as well as food products. It would seem that retail should skim the cream off the top and pass on price increases to customers. But this is not the case - people save more on products where a high marginal markup of the intermediary is allowed, and in the pricing of essential products there are taxes built in.

Despite all the above negative factors, there were success stories in the Russian stock market this year. Some companies demonstrated stable growth and profitability against the background of a shaky market, among them Gazprom (MCX:GAZP), Sberbank Rossii PAO (MCX:SBER), VTB (MCX:VTBR), and NK Rosneft PAO (MCX:ROSN).

Gazprom posted an IFRS profit of 1.59 trillion rubles in the first 9 months of the year, compared to a loss of 202 billion rubles a year earlier. The company expects that it will receive record dividends and have a double-digit dividend yield by the end of 2021.

As for Sberbank, its shares have become the most popular securities in Russian-language social media in 2021, according to a study by Brand Analytics. The second place in the ranking was taken by shares of the already named Gazprom, with third place taken by Yandex NV (MCX:YNDX) (NASDAQ:YNDX). Since the beginning of the year, ordinary and preferred shares of Sberbank went up by about 20%.
VTB's IFRS net profit in the first half of the year increased by 307.2% year-on-year and amounted to 170.6 billion rubles. Moreover, VTB is often cited by experts as one of the best investment opportunities among Russian companies in 2022. The head of the bank Andrei Kostin predicted that by the end of the year VTB's profit will exceed 300 billion rubles. At the same time, top managers have repeatedly announced that they are going to keep plans to pay 50% of net profits to ordinary shares. Presumably, next year VTB will show an unprecedented high dividend yield of about 15%.

At the end of Q3 2021, Rosneft's financial results exceeded forecasts, with net income up 35% on Q2 2021. In addition, a strong factor in the attractiveness of investment in Rosneft is the implementation of a major project, Vostok Oil. Many analysts also consider it an attractive target for investment. The Russian broker BCS included it in a similar list in December. In addition, the largest U.S. investment bank J.P. Morgan also put Rosneft on the list of best global opportunities in 2022. Analysts believe that the oil sector will be the driving force behind economic activity in Russia. The oil price is projected to continue its rise in 2022, with an average expected price of $74 - a level above the annual average for the past 7 years

Also see our Summary of «РОССИЯ ЗОВЕТ!» “RUSSIA CALLING” 2021

NEW YEAR FINANCIAL RESOLUTIONS : 6 TIPS

• Make your goals specific and commit to a detailed plan. Using physical reminders like notes around your house, labels on accounts, or calendarreminders can keep you on track.
•  Schedule time to make financial decisions.
• Have a plan for avoiding common money pitfalls like loss aversion. You may be able to sidestep it by working with a financial professional.
• Automate as much as you can to make financial housekeeping easier and to stick with your plan.
  

 

Psychologists and behavioral economists have studied people's behavior around money for decades. All that research has turned up some steps you can take to help support your goals.

1. Pre-commit: Make your goal very specific
For instance, let's say your goal is to make 2022 the year you get physically fit. One way to help support that goal is by making a very specific plan and reinforcing it with supporting actions.
Here's what that means: If your goal is to go to the gym every day at 8 a.m., set an alarm to remind yourself to go to bed on time and wake up early, set out clothes and shoes the night before, and have coffee or water ready. There's less opportunity to think too much or bail out once you've smoothed the way for success.

Research shows that when people commit to saving early (before they've gotten the money) they do it. It's more difficult once the money is in hand and there are bills to pay.

2. Earmark money for specific purposes and give yourself a physical reminder of your goal.
A recent study found that putting cash into a sealed envelope and writing the purpose on the envelope made it harder for people to spend the money on something else.

It's harder to take the money out and use it for something else. There's a mental and emotional hesitancy.
You can use an envelope, a box, or even a bank or brokerage account. Many banks or financial services firms let you label your accounts and that can help reinforce your decisions as you spend and save.

3. Schedule time for finances
If you're waiting for the perfect time to feel ready to do some financial housekeeping, it may never come.
If you want something to happen—put a date on it. People are bad at forecasting when they would feel good but making an appointment with yourself can help you pre-commit to doing the work you may have put off.

4. Know your money personality
Are you an adventurer who constantly searches for the next hot stock to buy or are you a creature of habit who likes to stick with what has worked for you in the past? Both have positive aspects but there may be downsides. Knowing your tendencies toward money can help you rein in risky behavior and play to your strengths.

5. Know your money preferences and learn to work around them
As we navigate the world, making decisions and choosing our paths, our thoughts fall into predictable patterns that can cost us money or lead to bad choices. Our innate preferences are sometimes called biases and they are automatic reactions that we don't always think about carefully—and that can be costly.

Loss aversion is another potentially expensive bias. The fear of losses can be more motivating than potential gains and avoiding losses at all costs can be, well, costly. For long-term investors, the stakes are high—investing appropriately for your time frame and financial situation can be critical to meeting retirement goals or paying for a happy household living.

There are ways to combat this one too. Staying focused on your goals, understanding the history of the stock market, and tuning out anxiety-provoking news can help.

6. Put saving and investing on autopilot
Automatic saving can help keep your savings plan on track no matter what else is going on in your life. Not only can you make saving automatic, you may be able to make investing automatic as well. That can help you avoid tinkering with your investments or trying to time the market as it ebbs and flows.

Building great habits doesn't happen overnight but a little planning can set you up for success in the new year. 

Getting professional help with your investments can be reassuring as well.

Have a Prosperous year