February 27, 2022

The Good News About Bad News

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We may have overloaded you with content this week with our 2022 Outlook presentation “Cleared for Landing” on Wednesday and a couple of media appearances on Thursday, so I will make my “fog cutting” written comments brief and to the point.


Bottom Line:


This week, Russia invaded Ukraine, the US and Europe responded with strong rhetoric and soft sanctions, stock markets rallied, and oil prices fell. Predictable? Not in form, but perhaps in function. Investors entered the week with sentiment set on Armageddon, making a rally historically predictable, regardless of events. Whenever investor sentiment plumbs lugubrious lows… less bad news feels like good news… and a little good news goes a long way.



The Full Story:


Russia Takes Ukraine


Ukraine could not repel Russia’s invasion this week without international military support. This was not on offer. Therefore, sanctions remained the only available allied strategy for deterrence or reprisal. Russia sells oil, gas, wheat, and industrial metals, most of these directly to Europe.


Indirectly, since Russia is the world’s 2nd largest natural gas producer and the 3rd largest oil producer, any interruptions within those markets would levy even more inflation on nations (like the US) struggling to contain it. As such, Europe and the US developed a sanctions package that does not affect energy markets or the financial transaction systems that support them. Minimal military damage and minimal sanctions result in minimal global economic consequences from Russia’s Ukrainian invasion.


The post-invasion geopolitical consequences remain significant, but from an economic standpoint, if the allies do not have the resolve to disrupt the energy and transactions networks, it’s basically a non-event.


Buy Fear


There are 1805 weeks of data within the AAII Investor Sentiment Index. This index polls retail investors weekly and measures the number of Bulls (markets will rise!) and Bears (markets will fall!) and Neutrals (no clue!). For the week ending 2/24, 23.4% of those surveyed were bullish and 53.7% were bearish for a “Bull-Bear Spread” of -30%. Of the 1805 weeks in the database, only 30 weeks had lower investor sentiment readings. For that data set, the S&P 500 median price return one year later was 22%.


Of the 30 readings lower than today, 13 coincided with the Iraqi invasion of Kuwait in 1990. The “Bull-Bear Spread” averaged -39% during that period as investors dealt with the surprise invasion, the doubling of oil prices overnight, the initiation of Operation Desert Shield to protect our oil interests in Saudi Arabia, and the mobilization of US forces during Operation Desert Storm… which we all watched live on TV. Yikes!!


One year later, across those 13 occurrences, the S&P 500 price index gained 23%, on average… and that figure does not include reinvested dividends, so go ahead and tack on a few more percentage points. The lowest sentiment reading in the entire database occurred on 10/19/90 at -54%, with markets 26% higher a year later. The second-lowest sentiment reading occurred on 3/5/09 at -51%, with markets 57% higher one year later. The best buying opportunity comes not when people are euphoric, but when they are despondent.




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The Citigroup Economic Surprise Index pairs economic releases (reality) against economist forecasts (expectations). Without digging into the details, the recent upward surge in the Citigroup Economic Surprise Index indicates that while investor anxieties boil over inflation, Fed hawkishness, and Russian aggression, recent economic data releases have OUTPERFORMED economist’s expectations.



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This chart from FactSet chronicles the path of analysts’ S&P 500 earnings estimates for 2022 and 2023. While estimates are not currently rising at the same pace they rose last year, the slope remains positive. Therefore, the continued upward slope indicates that while investor anxieties boil over inflation, Fed hawkishness, and Russian aggression, S&P 500 earnings estimates continue to RISE.


Have a great Sunday!



David S. Waddell 
CEO, Chief Investment Strategist




Sources: FactSet, Yardeni.com



David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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