Contextualizing Market Movement

March 10, 2022
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“The four most expensive words in the English language are, ‘This time is different’.”

Sir John Templeton

In the past few weeks, the horrific, bellicose events in Ukraine have sent shockwaves through the world and financial markets. Though this event was unexpected, market bumpiness is inevitable, and we’d like to help you understand this event in context by (1) considering historical analogues, (2) revisiting our investment tenets, and (3) discussing the current investment landscape and our positioning.

Historical Analogues

Current market concerns touch on two common historical themes: 1) war (Figure 1) and 2) financial stress arising in Asia (Figure 2). Historically, both have resolved themselves relatively quickly. As shown in Figure 1, previous wartime declines were relatively ephemeral¹. While tragic from a human life perspective, wars’ effect on capital markets has generally been muted throughout history.

Figure 1. The S&P 500 Index during wartime periods.

Source: Factset and Balentine

S&P 500: U.S. Involvement in WWII (Dec 1941 - Sept 1945)
S&P 500: U.S. Involvement in Korea (June 1950 - July 1953)
S&P 500: U.S. Involvement in Vietnam (Mar 1961 - May 1975)
S&P 500: U.S. Involvement in the Persian Gulf (Aug 1990 - Mar 1991)

In Figure 2, we analyze the period encompassing the Russian financial crisis and resulting demise of Long-Term Capital Management. The resulting market downturn was also transitory, with the market concluding contagion concerns were unwarranted. Note the similarity in the timeline with the Persian Gulf War: quick real-world resolution means quick market resolution, the market bottom occurring first.

Figure 2. The Russian financial crisis remained localized, resulting in transient market response.

Source: Factset and Balentine

S&P 500: Russian Financial Crisis (July 1998 - Dec 1998)


Our Investment Tenets

Balentine’s investment tenets are a function of one overarching principle: A defined investment process increases the chances of success by sticking to a discipline that works more often than not, preventing emotions from driving decision-making amid uncertainty.

Howard Marks, one of the greatest investment minds of our time, said, “The biggest investing errors come not from factors that are informational or analytical. But from those that are psychological.” All of us as humans have biases, most of which are based on history as we personally experienced it. Two investors could experience the same event oppositely, resulting in different interpretations of its impact. Because we are keenly aware of this, Balentine does its best to minimize the impact of our own personal biases when stewarding our clients’ investment capital. How do we do this?

  1. We rely on what the markets are telling us in terms of price action rather than our own subjective interpretations of events.
  2. We use objective models to interpret what the market price action is saying.
  3. We use risk management to ameliorate the possibility of permanent capital impairment.

This process can and does conflict with our internal feelings about the market quite often, which is exactly why we stick with our process.

The Current Investment Landscape

Because we do not know how the Russia/Ukraine scenario will evolve, we rely on our models to analyze the market’s interpretation of events. Notably, the invasion has reinforced preexisting underlying market trends rather than reversing them. For example, although the oil spike over the last two weeks has largely been driven by the invasion, the price breached $90 weeks before escalation, furthering a pronounced bull market almost two years in the making. Other examples include:

  1. Growth relative to Value has been topping for months now, with the NASDAQ-100 a noticeable underperformer so far in 2022.
  2. The most speculative elements of the NASDAQ have been underperforming even more spectacularly.
  3. Consumer discretionary stocks have been weakening since late last year, particularly in consumer goods.
  4. Gold had been percolating for months before breaking out in recent weeks.

Regarding the overall market, we expect choppiness to persist. Though volume has been lighter during recent drawdowns (indicating a waning number of sellers), we are not seeing enough fear in the market to suggest a definitive bottom is at hand despite bull-bear surveys presently suggesting a pervasive bearish outlook. Durable bottoms typically feature a “get me out at any price” moment which hasn’t occurred yet. Relatedly, put/call ratios in the options market remain at subpeak levels.

How does this outlook tie in with our investment process?
  1. We do not let the short-term dictate our asset allocation. In recent writings, we predicted 2022 would be bumpy as we approach the midterm election. We continue to believe this, and we anticipate the Russia/Ukraine conflict will propagate a continuing correction rather than a full-fledged bear market. Sentiment is bearish right now, which occurs near or at market bottoms. Even if a bottom is near, we continue to expect choppiness over the next five to six months.
  2. Our base case is that the U.S. will not enter a recession, technically defined as two consecutive quarters of contracting GDP, although a slowdown is likely. Even if a recession occurs, there may not be downside from here given that typical recessions include market drawdowns of 20%-25%. This projection is always subject to change but given that stocks were not overly expensive relative to bonds at the outset of this decline in January, history would suggest that we are already closer to the end than the beginning.
  3. Importantly, provided our thesis is correct and the current market drawdown remains a correction, our equity portfolio is well-positioned due to our overweight to U.S. Energy and our sharp underweight in Growth and International stocks, which have and will likely continue to bear the brunt of equity weakness.


Though experiencing a choppy market can be distressing, we hope this context helps put current events into perspective. That said, we know that you may still have questions about your individual situation, and we are happy to have a conversation with you. Please do not hesitate to reach out to your Relationship Manager for further discussion.

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