Market Outlook · March 08, 2022

Making Sense: Geopolitical Events and Your Portfolio

Brent Ciliano

CFA | SVP, Chief Investment Officer

Phillip Neuhart

SVP, Manager of Institutional Portfolio Strategy

Making Sense: Geopolitical Events and Your Portfolio Video

Amy: Hi, I'm Amy Thomas, a Delivery Specialist with First Citizens Bank. I'm joined today by our Chief Investment Officer, Brent Ciliano, and Manager of Institutional Portfolio Strategy Phillip Neuhart. In light of recent events, we've received a number of questions following our most recent Making Sense Webinar, and we want to address those directly. Please note, the information you're about to hear are the views and opinions of First Citizens Bank and should be considered for educational purposes only. So, given that we've seen a lot of ups and downs in the recent days and all of the news headlines, can you talk a little bit about what we've seen historically during geopolitical events for markets and corporate earnings?

Phil: Absolutely, I mean, when you look back, even since 1940, on average, the S&P 500 following geopolitical events is up in 1, 3, 6 and 12-month time frames. So, there's variability around that average. But on average, geopolitical events are actually an opportunity. Looking at that one year out number post these events, the S&P 500 tends to be up over 12%.

Brent: Yeah, it's kind of crazy actually and when you look at those 12 events, five of them were, you know, in wartime, everything from Pearl Harbor to the Gulf War to the Iraq invasion. And what I found really interesting, Phil, is that of those five events, the largest drawdown that we saw post those events was only negative 10.7 on average it was about 1% or 2% drawdown from peak to trough. And then post that, 12 months later for all five events on average, you're looking at 23.5% positive from event to that level. Three of the five were in excess of 29%, four of the five saw double digit returns 12 months post.

Phil: It's really incredible, and it's about the market eventually turns to fundamentals. If you look at earnings revisions around these geopolitical events, immediately following the event, there's actually very little revision. We look longer term. It starts to come into the numbers, but there's other factors driving those numbers and often on average, you don't see much revision at all. Now each event is created differently. There's specifics to every event. Today, for example, the price of crude oil has skyrocketed. When you think about that, that could have impact to earnings on both the negative side and the positive side, depending which sector you're in.

Brent: Yeah, and you know, from a big picture perspective, putting this all together for this year, we are still very constructive on markets and we still see 4,900 as the target for this year. And again, like we said in our previous Making Sense Webinar, we're looking at 8% to 10% earnings growth for 2022 and about a 5% to 7% multiple contraction. Netting those two together, that gets you to that at about three-ish percent growth year over year for the S&P 500 and again, a target of about 4,900, Amy.

Amy: So Phil, during times of turmoil we always like to turn to our fundamentals. Can you give us a few data points that we should be watching out for?

Phil: Absolutely. So at times like today, the markets trade on emotion, headlines, animal spirits—as you'll hear it referred to—and we eventually turn to fundamentals. Fundamentals win in the end. So, things to watch for. One, the labor market. We are a consumer led economy. What is happening in jobs matters a lot and the labor market is very tight right now. First Friday of each month, we receive the jobs report, which you'll hear it referred to. That shows the gain in non-farm payrolls, the change in the unemployment rate, the change in the participation rate, which is critical right now. If you want something higher frequency, initial jobless claims comes out Thursdays at 8:30 in the morning. That is a weekly data point that tells you where are jobless claims. If that's going up, that might be a bad indication for the labor market. Inflation, critical right now. The next report is on March 10th as we look ahead, that tends to come out around that time each month. Right now, the market will be watching headline inflation carefully because of the price of gas going up. That might not feed in for months, but still, something to watch. And then additionally, core inflation, which excludes food and energy, does that start to roll over in coming months? So, something that's critical and something to watch for. Another thing that we'll be talking about more later is Fed funds rate hike expectations. So, Fed funds futures are a pricing mechanism. If you Google them, you'll be able to see what is the market pricing in terms of the Fed funds rate. It’s moving around a lot now, but something to watch. And then finally, earnings revisions. This really is as simple as keep an eye on the market during earnings season. What are companies saying and are we seeing earnings revisions turned down? In the end, the market is all about earnings. You can't ignore those if you're thinking about fundamentals. Though, right now, if you think about where we stand, what we think about the economy, we think we're still on strong footing, right? If you listen to our recent webinar, we discuss that in detail, but right now we remain cautiously optimistic.

Amy: So, Brent, let's jump back to market volatility. How often do we see US stock sell offs and should we see that, use that, as an opportunity?

Brent: Yeah, I mean, stock sell offs are very, very common part of markets up and down. On average, over the last 40 plus years, we've seen an intra-year drawdown virtually every year. So, it's a normal part of market volatility. On average, over those 42 years, we've seen an inter-year drawdown of negative 14%. Even if you exclude some of the bigger years where we had major drawdowns, the average intra-year drawdown is still double digit negative, so it's a normal part of everyday market activity.

Phil: And look, there's exceptions to everything, right? If you think about big drawdowns, the tech bubble in the early 2000s, the great financial crisis of 2007 to 2009. These were multiyear drawdowns that took multiple years to come back. But in our view, this is not a long-term structural drawdown. We believe this is more of a correction.

Brent: Yeah, and Amy, your question about is market volatility an opportunity to get long into the market? And if you go back to 1950 when we've had 10% corrections—median observation post 12 months—you're looking at positive 15%. So historically, drawdowns of 10 percent—sort of what we're seeing today—have in fact, historically been a good entry point for stocks.

Amy: So, Phil, for months, we've heard from the Fed that they're planning to raise rates starting in March with multiple rate hikes throughout the rest of the year. Can you talk about whether or not that's still the expectation?

Phil: It's still the expectation. If you look at Fed fund futures as we sit here today, it's changing pretty rapidly, but they're pricing 5 to 6 25 bps or quarter point hikes from the Fed this year. Compare that to just October of last year, in which there were very few hikes in price. These things are moving quickly. A couple of weeks ago, Fed funds futures were pricing six to seven hikes this year, so it's moving really rapidly. And as you watch the March meeting, right now, consensus and futures are pricing a 25 bps hike in the March meeting. A couple of weeks ago, that was 50 bps, so we can all agree the Fed is hiking. At what pace, I think, is really where the debate is.

Brent: Yeah, I mean, big picture, we think that, you know, market participants are overestimating the amount of hikes that we're likely to see this year. For us, it's not necessarily the biggest thing or the most important thing. For us is, in the entire cycle—which could last multiple quarters, if not multiple years—we think that the market might be underestimating the total amount of hikes that we'll have in the cycle. Right now, they're sitting at about, you know, one and 3/4 percent final value for Fed funds. We think potentially that could be higher if we look back to previous cycles back in 2015, 2016, 2017 that terminal value was much higher at about 2.5%. So again, we think the market might be overestimating this year, but underestimating the amount of hikes in the full cycle.

Phil: And these things are changing rapidly. I mean, just between March 1 and March 2, an entire new hike was priced in to the market based on some comments from Chairman Powell. So again, don't focus too much on the volatility. If there's a theme for today, it's focus on fundamentals. These things are moving quickly. And it's just another example of that, but focus on fundamentals and in the end, we remain cautiously optimistic.

Amy: Thanks for listening. We hope you found this information helpful. For our latest updates, please visit and look at our market outlook page.

In light of world events that may be impacting your portfolio here at home, Brent Ciliano, CIO, and Phillip Neuhart, Manager of Institutional Portfolio Strategy, take a step back to provide perspective on recent geopolitical turmoil and market volatility. In this video, Brent and Phil answer questions they've received following February's Making Sense market update.

  • How have US markets and corporate earnings historically reacted during times of geopolitical unrest?
  • What fundamental data points should be monitored?
  • How common are stock sell-offs and should they be viewed as opportunities?

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