What We Can Learn From Ukraine

By Jason Bodner, Editor, Outlier Investor

Nobody likes to wake up in the morning and see that one nation has invaded another like we did on Thursday this week. Yet the trouble between Russia and Ukraine has been brewing for some time.

Russia invaded Ukraine before in 2014, leading to the annexation of Crimea. President Putin has wanted to get his hands on Ukraine for a long time.

And as readers know, the latest action has stirred up markets, sending them topsy-turvy in recent weeks as fears built up.

But as investors, it can be useful to analyze comparable historical events through a market lens.

We can draw insights from seeing how markets played out in 2014 and how they’re reacting now.

So in this essay, let’s look at today and eight years ago from a market perspective to see what lessons we can learn…

Looking at the Past

Circumstances change (last time it was Crimea, and this time it’s multiple fronts). But Russia’s invasion essentially gives us a comparable, recent, yet rare set of conditions that have shaken markets.

So let’s take a look…

As longtime readers know, one factor I like to look at is what the biggest investors out there are doing. These are hedge funds, institutional investors, and so forth. I call them the “Big Money” because their actions can move markets.

And here’s the ETF selling by Big Money investors during the 2014 Ukraine invasion:

Notice the sharp sell-off as the market plunged? Yet it was followed by a swift recovery as the conflict resolved.

Now look at last month:

Our setup is eerily similar to 2014. In each circumstance, the markets sold off in anticipation of the military action and its consequences.

With that in mind, investors can perhaps breathe a small sigh of relief knowing the 2014 dips were short-lived. That provides some hope for our current situation.

Now let’s look at the broader trend over the last two years:

We’ve seen short, furious dips followed by upward climbs.

I’m not necessarily saying history will repeat itself. Yet there are similarities between the 2014 invasion of Ukraine and what’s happening today.

And another similarity appears to be energy investing…

Energy Is Rising

Leading up to the 2014 invasion of Ukraine, there was a run-up in energy prices. Take a look at the chart of the Energy Select Sector SPDR Fund (XLE).

During the roughly month-long military conflict, XLE chopped along sideways. Once the operation finished on March 26, 2014, XLE rose for months (until the Ebola virus crisis in October 2014).

Today, XLE has experienced a good recent run and Big Money buying as well:

Naturally, where it goes from here – during an ongoing military conflict – nobody knows for sure.

So how should investors position themselves in our current environment?

Where Do We Go From Here?

These days, sentiment is bearish. We’ve gone from COVID doom to inflation and interest rates and now to Russia and war… It’s anybody’s guess what’s next.

A common thread in these events lately is downward momentum on markets.

And while we may be tempted to sell and sit on the sidelines, there’s a good reason for us to have some optimism, even outside of our 2014 comparison.

You see, the market pullback we’ve been experiencing is music to the Federal Reserve’s ears.

It hasn’t had to lift a finger to raise interest rates. Rather, the corrective events to tighten the money supply are happening naturally.

This is what I call “ghost tightening.” The much-needed economic cool-off to tamper inflation is occurring without any actual Fed intervention policy (yet).

In the long run, the markets should be just fine, especially if they follow a similar route as 2014.

And once the markets realize that the Fed won’t raise rates seven times this year – as rumor wants us to believe – we’re going to see a resurgence into the sectors that investors have oversold.

I believe in quarter three and quarter four, equity markets are going to be playing catch-up.

So now is a great time to go searching for stock deals.

The SPDR S&P 500 ETF (SPY) has lost 9.82% so far this year, as of writing. It’s in a significant downturn. This makes the current situation a great time to find value for long-term investors.

And the SPY’s troubles don’t compare to the downdraft happening in the software sector. The iShares Expanded Tech-Software Sector ETF (IGV) is down 15.49% in 2022 so far.

Remember, each of these ETFs holds a basket of individual stocks. And many of these great stocks that are beaten down right now could be great values over time.

Just like in 2014, we may be glad if we use these current circumstances as a buying opportunity.

And, of course, if you’d like to see the specific stocks primed to do well in 2022 – not just ETFs – please check out Outlier Investor. In my research service, I use data to locate the best outlier stocks set to succeed. Go right here for more information.

Talk soon,

Jason Bodner
Editor, Outlier Investor

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