Stocks dropped again last week, but despite the decline it’s fair to say that it could have been worse. The negative headlines last week were incredibly consistent: Continued escalation in the Russia/Ukraine war, hawkish surprise by the ECB ending QE in Q3 (sooner than expected), inflation hitting yet-another 40-year high and commodity prices exploding higher. And those were just the majorly negative headlines (we’re not including negative commentary from companies such as Booking.com, the renewed implosion of Chinese shares on delisting fears, higher yields despite growth headwinds).
I have been through a few markets that have been up, down, sideways, straight down but I have been perplexed as to why this has traded so differently from the start of the sell-off in January. I was determined to find out why this was so I spent a lot of time on the phone last week speaking to seasoned hedge fund managers, market experts, practicing economists, and even a few academics to find out what what the crowd is missing.
WHAT I FOUND OUT. Since the start of the invasion of Ukraine there has been a lot of selling. There are a lot of Russians who have invested in the US markets, along with large banks like JP Morgan, Citi, Chase, etc., as well as some very large private equity shops and hedge funds, and some mutual funds and fund companies like BlackRock and Fidelity. These funds who have been doing business with the Russian oligarchs’ money are being told to leave their institutions before they are required to leave. Which means these firms are doing mandatory redemptions of equities and bonds and wiring the Russians’ money back to them in cash or Rubles. In other words, forced selling. It looks like at least $300 billion of selling in our markets and the overseas markets. That is why every time the markets rally just a little bit the selling starts again; they are being forced to sell. Many institutions are in a bad situation and the easy answer for them is to redeem the Russian money and return it to them. This is where all the downward pressure is coming from.
We have to walk a very narrow line. Once the oligarch money is liquidated this will ease the selling pressures. I’m not saying the sell-off will not continue, but it will ease the pressure. There are still a lot of negatives, the war in Ukraine and four decade high inflation.
We are still sitting on a lot of cash right now. We have a lot of purchasing power right now. The selling from the Russian oligarch money will dry up soon because forced selling creates way oversold markets that could create a once-in-a-decade deal. For now, it is important to be patient and let the markets jump around. I don’t know what the future will bring, but if history is any indication I would not be surprised if the markets close up in the last half of 2022.
And remember – the one fact pertaining to all conditions is that they will change.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President