How To Interpret The Changing Market Landscape

By Sumit Handa, Managing Director, Partner, and Co-Head of the Investment Committee for Pennington Partners

Crypto Winter. War in Ukraine. A stock market drop: What’s an investor to do?

When we look at the drop in stock market values, we see this as the result of two factors: Covid lockdown policies that were drawn out far longer than they should have been, and monetary policies that have so far been ineffective at containing inflation. Even though, as of this writing, China has eased lockdowns in Shanghai, the reduction in output will still be felt. Also, we have our doubts as to whether rising interest rates will curtail inflation.

While we unequivocally do not support the Russian invasion of Ukraine, it is critical to fully understand the negative economic consequences of the sanctions that have been imposed as a result. We are seeing economies make decisions right before our eyes that will change how they operate for decades to come. Whether you support a return to deglobalization for example or not, what we have done to “punish” Russia is having real effects on our economy and way of life. We wonder if these were the right moves, and how long Americans are willing to accept them.

Additionally, many European countries are cut off from Russian oil and gas, but many renewable energy options are not yet economically viable on a large scale. The limited availability of energy will damage these economies – noticeably – for years to come.

With spreads widening, we are already seeing Italy exhibit real problems, and fear a repeat of the Greek credit crisis of 2011 is not far off either. We expect Russia and Ukraine to come to an agreement, but not before the full extent of food shortages are felt across the globe. Further, what is most alarming, is that it is difficult to imagine that higher interest rates alone will not lead to a reduction in the price of wheat or fertilizer…

So, as a $1B+ multi-family office, here are some of our expectations for how the fast-changing economic picture is impacting the 2022 market landscape:

• A wave of deglobalization in the U.S. – American businesses will not want to be stuck waiting on goods from overseas, and so we predict more investment in manufacturing, jobs, and innovation. The resulting reduction in uncertainty will be welcome – especially if further territorial invasions take place – but the commitment to manufacturing more products here will also lead to higher prices for consumers.

• The current realignment of cryptocurrency values appears justified – There are nearly 20,000 digital coins in existence, and the vast majority of them have no use or offer no utility. While cryptocurrency technology does serve a purpose, it is too soon to fully realize its benefits. As a result, rallies for even the most useful coins are still highly speculative. It costs roughly $15,000 to mine Bitcoin and the value should not be much higher than this.

• The disappearance of unprofitable businesses in Silicon Valley – Many firms are pulling back their funding, which will lead to significant unemployment at businesses that are not turning profits – perhaps even leading to their closure. Job offers are being rescinded and the demand for tech talent will likely fall more in line with supply.

Despite all this turbulence, we do believe that we are within 5-10% of a near-term market “bottoming out,” though it is important to remember that the market can always get oversold. With that said, we do expect a second half-of-the-year rally, prefer credit to equity, and are recommending that clients prioritize investments in energy, materials, and consumer staples, along with investments in high-quality businesses.