There Are Many Fallen Angels in the Market Right Now
American markets today, viewed several hours before the 9:30 a.m. Eastern time opening appear set for a strong start with the DOW, S&P 500 and NASDAQ all in positive territory at time of writing. The S&P is wavering slightly but should be able to stay in the green for the trading day.
Canadian markets also appear poised for a positive open with both the TSX 60 and TSX Composite firmly in the green.
European markets are open at time of writing and the major indices there including the FTSE 100, DAX and CAC 40 all positive.
Amongst precious metals gold and silver are down.
Amongst currencies, the Canadian dollar, Euro and British pound sterling are all up against the American greenback.
This follows yesterday’s drop in major indices as markets took back most of Wednesday’s gains and resumed a sell-off triggered by inflation worries, looming interest rate hikes and the belief that the Russia-Ukraine war has no end in sight. Consumer prices shot up by 7.9% in the twelve months ending in February. Not surprisingly, fuel costs and food prices accounted for most of the increase.
Figures at the end of March will more accurately reflect the impact on consumer prices of the Russia-Ukraine war and Western sanctions. Some analysts suggest that we must be prepared for more bad news with upcoming figures. “This inflation report might be just a prelude to an even uglier report when we get the March data,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin. “The Fed(eral Reserve) can’t bring peace to Ukraine and Russia, so there’s little that monetary policy can do to tame food and energy inflation,” he said in a Reuters report.
Indeed, the current market climate leaves investors wondering about many other questions, amongst them the net impact on European equity markets. “The actual situation is very difficult to draw firm conclusions around,” says James Athey, Investment Director at Abrdn in London. “The Russian goals in this situation amount to a veto on Ukrainian foreign policy while the EU (European Union) and NATO (North Atlantic Treaty Organization) are not willing to fully embrace Ukraine sufficiently to deter Russian aggression.”
While financial sanctions on Russia will exact a high price, they will also come at a high price for Europe, he says. The conflict has created a heavier headache for the European Central Bank which was already struggling to formulate a policy that would please its members. “None of this is helpful for equity markets which were already priced with a rather rose-tinted view of the future in mind,” he says.
Russia continues paying a price. Earlier this week, Fitch Ratings Group downgraded its Long-Term Foreign Currency Issuer Default Rating to ‘C’ from ‘B’. Fitch says that the ‘C’ rating reflects its view that a sovereign default is imminent. If that happens the shockwaves will be felt throughout Europe and very possibly further abroad. Russia’s response to sanctions could include selective non-payment of sovereign debt payments according to Fitch.
A term that gets misunderstood at times like these is ‘buying opportunities’ and some investors are grappling with whether the recent plunge has created these opportunities. The answer from this corner is that we need to approach this with maximum caution. This my not be the time to buy everything that looks like a buying opportunity. The proof is easy: Wednesday was a spike – albeit a welcome one – and then on Thursday the markets continued downward. We do not know where they will find a bottom and we do not know how exactly how many interest rates we will face this year.
In a war in which Russia’s foreign minister Russian Foreign Minister Sergei Lavrov claims "We are not planning to attack other countries, and we did not attack Ukraine,” it becomes impossible to guess Russian President Vladimir Putin’s real end game, except that fighting will not end very soon. And we do not know exactly how many interest rates we will face this year. Certainly, there are many fallen angels in the market right now but let’s wait for a short period and see whether they fall further. (Fallen angels are otherwise solid stocks that have fallen temporarily on hard times and have a solid chance or recovery.)
This is not a good time for risk-taking.
Related: How to View & Measure Stock Market Volatility
Al Emid is a financial journalist, broadcaster and author with two books underway.
The Emid Report on Volatility 2022 – the next in the series -- is scheduled for release in Summer 2022 and his book on foreign investing is scheduled for release in January 2023.