We cannot be sure why he chose to withdraw further aggression given that he had been clearly planning this move for weeks. Perhaps it had to do with the threat of sanctions from the U.S. and Europe. Perhaps not.
NOTE: One conspiracy theory that the Investment Committee believes hold some merit is that Putin backed off on Tuesday given the financial impact to Russia. He is a large owner of equities, and most of his allies are very powerful and wealthy individuals in Russia who lost billions in the 11% selloff in the Russian equity market on Monday.
Markets immediately rallied hard across the globe, as concerns over a full-blown invasion seemed highly unlikely. In fact, the S&P 500 saw its best day of 2014, erased all the losses for 2014, and even reached a new all-time high.
Panic selling is a kneejerk reaction driven by human emotion rather than fundamental analysis, and equity markets are frequently impacted by this behavior.
Let’s walk through some of the more recent selloffs and determine which have been predicated upon changing fundamentals:
“ January 2014: Concerns over a looming correction of 10%+ in equities and fears in emerging markets spooked equities. However, company earnings were reported to be quite healthy and contagion from emerging markets were overblown.
“ October 2013: Investors panicked over the government shutdown and potential default on U.S. debt. Both ended up to be nothing more than political charades and masking economic data that pointed to a slow and steady recovery in the U.S. and Europe.
“ August 2013: The truly terrible events that occurred in Syria caused the S&P 500 to decline almost 1.5% the day the news was reported. Most companies in the U.S. have next to no exposure to Syria, however, they sold off for the sole reason that investors’ appetites for risk reversed.
“ June 2013: Fears over tapering of the Fed’s quantitative easing program caused panic worldwide and little was spared. But the Fed would only taper their bond buying if they felt that our economy was getting stronger, so stocks should do well in an improving economy. This counterintuitive behavior fortunately did not last long, and today tapering has been well received by investors.
Despite all of this panic selling, the only notable trend that emerged is that equities climbed higher each time because the catalyst for each selloff had nothing to do with the fundamentals of our economy and/or the fundamentals of the companies that compete in our economy.
Simply put, long-term investors can profit handsomely by spotting trends, and therefore, we have used these selloffs as opportunities to put cash to work.
Implications for Investors
In a span of just two trading days, we saw volatility spike and equity prices whipsaw over next to no change in the underlying fundamentals of the U.S. economy, the world economy, and/or companies that participate in these economies.
NOTE: If anything, we may actually see some good come out of Putin’s aggression in the form of increased exports of energy from the U.S. to other countries. Western Europe could certainly use an additional source of natural gas, and we would be a very welcome supplier given our vast resources and stable government.
The bottom line is that we’ve seen this behavior before and we will see it again. The Investment Committee even welcomes such irrational selling and we continue to sit patiently, waiting for these wonderful buying opportunities to emerge.