Upset Markets Carve Out New Opportunities and Defensive Plays

Shah Gilani|February 25, 2022

There’s no reason to beat around the bush this week.

I’ve cancelled our regular Buy, Sell, or Hold this week to address what is on everyone’s’ minds this week: Russia’s invasion of Ukraine, the dramatic selloff that followed, and what can be done about it.

You can access this Emergency State of the Markets by clicking the video or reading the transcript below.

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State of the Markets 2/2022 Transcript:

Good day, all. Shah Gilani here on what would normally be Friday BS.H – Buy, Sell or Hold. But this Friday, I’m coming to you with an update on market activity yesterday and where we’re likely to go.

As you all know by now, Ukraine was invaded by Russian forces yesterday, Thursday morning, very early East Coast time – and the markets reacted accordingly, selling off dramatically.

Nasdaq Composite yesterday, Thursday, was down 3.4% at its lows of the day; the S&P down 2.6% at the lows of the day.

The obvious recipient of any sideline money that was sold was the US Treasury market and gold. Treasuries’ prices rose, yields dropped from 1.99 yield on the 10-year treasury down to 1.927. So a rush of flight to quality – certainly understandable in times of panic.

I’m recording this for you, the market reaction as far as equities, while understandable, seems a bit, I would say, crazy in terms of the Nasdaq having been down 3.4% at the lows of the day. And now, again on Thursday, the Nasdaq as recouped its entire lose and is now up 1% at 13,162 – up 125 points after being down a remarkable 450 points at its lows of the day today on Thursday.

The reason for that is the likelihood investors feel that the Fed may look at the incursion by Russia into Ukraine as an emergency necessitating them not raising rates. I don’t think that’s going to happen. I think that the rapid sell-off of the Nasdaq was justified; the bounce back I think is unjustified. I don’t think that the Federal Reserve will change course in March. I think we’re – I still expect a 25-basis-point hike in March, and probably at least five to seven 25-basis-point hikes throughout the rest of 2022.

As far as the rest of the market, as far as the S&P, the institutional benchmark of the stock market, unlikely that it will end up on the plus side today, unlikely that we will see a significant move back out of correction territory. The Nasdaq Composite in bear market territory scrambling to try to get out of bear market territory – that is the signal as far as those two major indices go.

Just for some clarity, the Nasdaq started its descent into bear market territory back in November of 2021. As far as the Dow and the S&P, they started losing in January. Both indices made record highs in early January and subsequently have continued a downward slide, and both are in correction territory. It’s unlikely that there will be enough action/reaction in terms of what Russia might to do mediate the situation on global basis for other countries where sanctions might be lifted any time soon and that bodes ill for commodities in term of prices; that bodes ill for inflation.

Russia is the largest, single exporter, largest exporting country in the world of oil. It is the largest exporter in the world of wheat. It is second largest in the world in terms of corn exports. So those commodity prices are already significantly higher today. Oil and WTI, West Texas Intermediate, over $100, has backed off a little bit since then. Brent is about $103 and is back up a slight bit since then. It’s unlikely that oil prices are going to come back down. They will remain elevated. That bodes ill for inflation. It’s unlikely the Fed will be able to cut back on what it expects to do in terms of hikes because inflation now with higher commodity prices ahead, with higher energy prices ahead, will be probably more out of line, higher in terms of expectations for later in the year when analysts had hoped that we would see a deflation of those inflationary expectations. That now appears to be unlikely.

So, the Fed is going to have to raise, it’s going to continue to have to raise. And given all of this action in the markets with corrections and bear markets and in terms of the Nasdaq, that looks like the possibility of a long-term sideways move down where we are here.

Could we go lower? Absolutely.

I would say the whisper – the fear out there – is stagflation. Stagflation being a slow to no growth economy in the face of rising prices. So, we certainly have the inflation component. As far as the economy slowing down, this may be the beginning of what might be a Fed-induced recession. How slow the economy might get in terms of its growth, it’s unlikely that it will probably turn negative, but slower growth means, or at least pretends, potential stagflation.

In the history of stagflation (the modern history of stagflation in the 70s and early 80s) markets went sideways to down. So that’s what investors are fearing right now. I’m not saying we are going to see stagflation, but we are likely to see a slowdown in GDP growth in Q1. The Atlanta Fed’s GDP measure of growth in Q1 is 1%. It had been three weeks ago .1%. They have since bumped that up based on their algorithm to 1% GDP growth in Q1. So that’s a big comedown from Q4, and that would certainly, I think in most investors’ expectations and mine, means we’re heading towards some kind of stagflation. However long that may last or not. But it is unlikely we’re going to see any kind of meaningful bounce.

So, what does that mean for everybody? It means you should mind yourself, mind your “Ps and Qs” in terms of your stops. If you’ve got profits, you should make sure you have stops in to take them if the market comes down further. There’s no need to put in stops right now or get out of positions today. If you didn’t have stops in place on Thursday, there’s no reason to get out of stocks now, especially or you don’t want to get out near the lows.

Friday… it’s going to be an interesting day. If we get any kind of bounce on Friday, let’s hope that we do, then it would be an opportunity to make sure your stops are in position, and if we go, I would say really you want to be concerned about a 5% lower move. If you have profits, you maybe want to move them lower. But you don’t want to be selling on the lows. We are going to bounce, we’ve probably seen the most of the it. I think the markets may see another, it’s possible for them to see another 10% move to the downside. In which case means technically we’d be in bear market territory for both the S&P and for the Dow Jones Industrial Average. But I don’t believe that the economy is going to slow down enough to warrant that, and I think the second half of 2022 looks good.

My projections for earnings are that they will pick up in the second half. So, I think any harder selloff now is actually a buying opportunity. And you shouldn’t have sold – hopefully you didn’t sell – on the frightening open on Thursday.

Now’s an opportunity to be looking for great companies on sale. And if we continue to drift down or we do see a hard sell-off, there will be plenty of quality companies with great balance sheets on sale. So, I’m going to obviously recommend some of my favorite companies on sale in the next couple of days, week certainly – and every Friday when I give you my normal BS.H.

I will certainly be pinpointing some of those that I like. And not only that but commenting as usual on stocks that you guys send me that you want me to determine in my opinion whether they might be a buy, sell, or hold.

The last thing I want to leave you with is “we are not out of the woods,” but we are likely going lower; however, that is going to create a buying opportunity. It’s just a question of how low we might go and where those opportunities are going to be. Going away, the last I have for you is I’ve got a keen eye on the VIX. The VIX’s long-term mean is 20. One standard deviation is 28. Two is 36. Three is 44.

So, what we’re looking at here is we’re looking at the VIX, again it closed on Wednesday, the VIX, at 31.02. So normally that’s a buying opportunity, short-term buying opportunity. Really with the market as dicey as it is and the prospect of what was likely to happen if Russia was going to invade Ukraine, it didn’t really give me a clear buy signal. I was waiting for further sell-down and we saw that with the VIX getting as high as 37.79 on Thursday. That’s a short-term buy signal and worthy of doing a little bit of, I would say bottom fishing on some of your favorite stocks. So probably not a bad place to take some initial positions with your sideline capital, certainly if you’ve been stopped out and taken profits, then you got capital on the sidelines and not a bad idea to go back into some of your favorite stocks that are on sale right now.

That’s it for today. I hope you guys have a good weekend. Let’s hope the markets strengthen up here. And if they are going to come down here, let’s hope it’s either hard and fast – to give us an opportunity to get in – or they meander down. But I don’t think we’re going to see much more than 10% more on the downside. Could we get to a 15% sell-off? Yes, but again, the economy still remains strong, and inflation is certainly an issue but will likely subside in the second half of the year in a meaningful enough way where markets will firm up and likely bounce in the second half of the year.

So that’s it for today. Hope you all have a great weekend. Cheers.

Shah