From the tech bubble of 2000 to the Great Recession of 2008-09 to the COVID-19 crash of 2020, Tom Wald is no stranger to periods of market uncertainty.
As Chief Investment Officer for Transamerica Asset Management, Inc., Wald uses his 30-plus years of investment management experience to analyze market conditions and offer his perspective for financial professionals and investors.
That experience is being put to good use lately.
After markets soared in 2021, Russia’s invasion of Ukraine and surging inflation have created volatility for the major U.S. indexes — the Dow Jones Industrial Average, Nasdaq composite, and S&P 500® — in the first quarter of 2022.
President Joe Biden’s move to restrict Russian oil from U.S. markets is likely to exacerbate inflation, which has already reached levels not seen in more than 40 years in the U.S.
If Europe follows the U.S. lead on banning Russian oil exports, it could drive oil prices even higher. Europe relies on Russian oil for an estimated 30% of its total energy imports, with Germany currently purchasing about half of its oil and natural gas from Russia.
Russia will feel the economic impact, considering oil and natural gas represent close to 60% of all Russian exports and 40% of its federal budget revenues.
The U.S. will need to increase its own oil production or find alternative sources to make up for the gap in Russian oil imports. In the meantime, gas prices will likely continue to rise along with broader consumer prices.
In addition, Wald writes that the Russia-Ukraine war is now casting additional risk onto several other important factors facing the markets.
Inflation reports continue to reach multidecade highs, with little relief ahead for the summer months, particularly as gas prices rise against the backdrop of declining oil supply.
The Ukraine crisis is broadening at a time when U.S. economic growth appears to be slowing in the short term.
The Federal Reserve will likely raise the federal funds rate to 1.00% by the conclusion of its July meeting and 1.50% by year end. The pace of inflation could potentially drive the 10-year Treasury yield to 2.50% by year end.
Against this backdrop of market concerns and uncertainties, Wald encourages investors to consider the following:
Brace for more volatility. Over the next few months, we are likely to continue seeing high market volatility as the war in Ukraine and other market uncertainties play out. That said, any legitimate resolution to the conflict in Ukraine, however distant that probability may seem at times, will very likely elicit a strong upside reversal in the market.
Employment numbers remain strong. Amid the backdrop of war, inflation, and declining first quarter economic growth, it is also important to recognize the exceptional job growth of late. More than 1.9 million jobs have been added to the U.S. economy in recent months, dropping the unemployment rate to 3.8%. We believe this is mostly supply driven, as those previously having left the labor force are starting to return in large numbers.
COVID-19 cases are falling fast. Since peaking at more than 800,000 cases a day in mid-January, the U.S. seven-day average of new COVID cases has fallen to fewer than 40,000. With almost 90% of the U.S. now qualifying as either fully vaccinated or COVID recovered, the virus appears to be moving from pandemic to endemic status by year end. All else being equal, this should help to improve consumer demand and mitigate worker shortages.
First-quarter earnings reports will be crucial. Current estimates for S&P 500 net operating earnings growth for 2022 continue to hover around 9%, with early estimates for 2023 growth at about 10% (FactSet Earnings Insight). Should these expectations remain intact following the first-quarter reporting season, this could bode very well for stock prices in the second half of 2022.
Entry points are more important than market bottoms. In these types of volatile markets, we believe investors should focus on identifying favorable long-term entry points for stocks, which likely is where we currently are, rather than attempting to call market bottoms.
Wald concludes with a message of optimism.
“While the unfortunate developments in Ukraine combined with existing market uncertainties have cast a shadow of investor pessimism over the markets, we continue to believe there are long-term opportunities for equity and credit markets,” he writes. “Like most market sell-offs where investor confidence declines in lock step with stock prices, this market may take some time to regain its footing, during which it will probably prove ill-suited for those with faint hearts or short time horizons.
“However, even against a backdrop of rising rates, inflation, and war, we are still inclined to side with economic and corporate earnings growth in the year ahead inferring currently favorable entry points for stocks and certain credit-oriented bonds in the existing environment.”
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Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index.
Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.
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