The Silver Lining Amidst Relentless Volatility

Last Monday, we said, “Although the S&P 500 held at the support level we expected, it seems unlikely that we will see a big move higher in the short term.”

Financial investment volatility, up and down arrows profit graph due to Coronavirus crisis, businessman trying to balance like a tightrope walker so that volatility does not gobble up his investments

Source: mentalmind /

And it turns out that despite a lot of stock market movement, the major indexes closed basically where they were at the beginning of the week. The S&P 500 was down a little more than a percentage point by Friday.

It is good that traders are “looking through” the crisis in Ukraine, and stock prices have been steady. However, the crisis remains the biggest unknown for the stock market and will continue to overshadow the normal flow of fundamental information.

And the longer the crisis continues, the worse global economic prospects will be because it has pushed — and will continue to push — energy prices higher. Ukraine and Russia are critical components of the energy market, and energy is a key driver of inflation.

The Positive Side

As everyone has discovered over the past year, fears of inflation are bad for the stock market.

At this point, we have to reiterate most of our recommendations from last Monday: The stock market is going to be choppy this week, and it will be difficult to forecast accurately. Investors looking to take profits in the energy sector should keep their fingers close to the sell button, but there may still be a little more upside if you can tolerate the risk.

Okay, this was a bit gloomy — but there are also some real positives to profit from in this market.

First, we have spent 20 years teaching investors how to use stock options to ramp up their income in the stock market. This is relevant right now because options inflate in value when the stock market is choppy.

Now is a good time to subscribe to our YouTube channel, Learning Markets, where tonight we’ll discuss three ways to consider potential market outcomes this month. We’re hoping it’ll offer a little peace of mind in turbulent times. Click here to join us at 7:00 ET tonight.

So even for investors without a lot of experience using options, this is a uniquely productive time to ramp up profits from income while stock prices are essentially stuck. Buying options has a deserved reputation for being very risky, but selling them helps us control risk.

Second, the stock market has been dropping because of external issues like Ukraine, although the conflict has not yet shifted the economic fundamentals in the U.S. For example, last Friday the unemployment rate dropped to 3.8% in the U.S. as nearly 700K new jobs were added to the economy. That was well beyond expectations for both measures.

That means prices have been pushed down and are not pricing in the growth that has occurred over the past three months. Right now, we think patient investors are likely to get the best deals in the tech and consumer discretionary, aka retail, sectors. Investors are distracted by the breakaway trends in energy and defense stocks, but one way or the other, those trends are going to reverse quickly once there is a timeline for an end to the conflict in Ukraine. At that point, we expect tech and retail to shoot back up again.

For example, Target (NYSE:TGT) and Best Buy (NYSE:BBY) were both up over 10% last week after surprising investors with much stronger-than-expected earnings. Right now, we think Nike (NYSE:NKE), and Ulta (NASDAQ:ULTA) are likely to repeat that performance when they report over the next two weeks.

Looking Ahead

This is another week where there isn’t a lot of additional news we can plan on. After Fed Chairman Jerome Powell set expectations for only a single quarter-point rate hike this month when he testified to Congress last week, we aren’t as concerned about inflation news.

However, keep your eyes open on Thursday when the Bureau of Labor Statistics will release the Consumer Price Index (CPI) again. As you know, the numbers are high right now, and rising energy prices aren’t going to make that look any better this month.

Also, on Friday, the University of Michigan will be releasing their closely watched “Inflation Expectations” report. This survey usually overshoots what inflation and interest rates will actually do, but it has an impact on market expectations anyway. And in the stock market, expectations tend to have a more reliable impact on prices than data.

In conclusion, it is hard not to be confused and uncertain right now. While the market’s underlying fundamentals are strong, uncertainty around the impact of the crisis in Ukraine is keeping prices down. However, we think this is still a good time to accumulate shares while prices are low.

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