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Where can investors hide as tensions escalate in Ukraine?

Where can investors hide as tensions escalate in Ukraine?

What happened?

For any market watcher attempting to forecast where stocks head over the next few months or predict the next 5-10% move in the S&P 500 – many hours have inevitably been spent grappling with two core macro unknowns and any number of potential scenarios.

Let’s start with Russia.

The years of tit-for-tat, finger pointing, and posturing around Ukraine’s eastern borders have culminated over the last few weeks in palpable fears that President Vladimir Putin will order a full scale invasion of the former Soviet state at any moment.  

The United States and other North Atlantic Treaty Organization members, notably Germany, France, and the United Kingdom, have pledged an array of swift and drastic economic sanctions that would greatly undermine Russia’s financial stability should Putin escalate matters further.  

The uncertainty and lack of precedence – at least to this scale, have left a prevailing sense of discomfort hanging over global markets.

Without diminishing the humanitarian impact of a greater escalation in the conflict, investors are mulling the viability of several scenarios and their corresponding impact on markets:

Russia invadeswould this send the S&P 500 down 5%? 10%? An invasion would have disastrous implications for the completed (but not yet approved) Nord 2 pipeline, set to carry critical natural gas from Russia to Germany. The price of natural gas and oil would likely skyrocket.

What tools does the Biden administration have to respond and how will they be deployed?

Further stalemate – Biden and Putin hold an awkward meeting this week where nothing is resolved, leading to a continuation of Russian military exercises at the Ukrainian border. Further threats of retribution in the event of an invasion.

While possible for another week or two, it’s unlikely tensions could hold at this level for several months without either boiling over or a modest de-escalation.

In this scenario we could see more of last Thursday-Friday’s price action – tweets in all caps and an algo-driven market that swings 1-2% on headlines.

De-escalation the hopeful, but perhaps least likely outcome.

Hostile but positive meetings between U.S. and Russian officials followed by an unwind of the troop buildup at the border.

A resolution is likely to bring a knee jerk rally in equities that could see the S&P 500 recover the ~5% it’s given up since Feb 9th.

Amidst all of the uncertainty, the S&P 500 finished down 1.6% last week, with the Nasdaq a touch worse, off 1.8%.

While the fate of Ukraine hangs in the balance, investors are also assessing what the range of possible outcomes might mean for the Federal Reserve as it prepares to raise interest rates for the first time since late 2018.

As of Friday, Fed futures markets placed a ~79% probability that the Fed would move forward with a quarter point hike at its March policy meeting. Looking at the year ahead, investors anticipate six hikes in 2022, implying a Fed Funds Rate between 1.5%-1.75%.

Will the Fed be more cautious should the situation in Ukraine spiral out of control?

The Fed seems more concerned about inflation than the geopolitical climate for the moment, indicating a market poised for more pain and choppiness over the coming weeks.

Themes in focus:

What worked?

Groceries and delivery – given its broad retail footprint, Walmart has long been one of the best proxies for inflation. The company posted a blowout quarter when it reported earnings Thursday morning, rising 4% on the day and 2% for the week.

Walmart was able to raise prices alongside surging costs and supply chain bottlenecks last quarter, as demand for food and gifts during the holiday season remained strong.

The momentum in Walmart’s grocery delivery business helped lift others in the space – Albertsons gained 1.9% last week, while food delivery service DoorDash managed a 0.8% gain on its own strong earnings despite the broader tech selloff.

The consumer staples group is typically a source of strength during market pullbacks and was a notable winner last week, with the XLP ETF up 1%.

Find it with Noonum: the ETF offering the greatest exposure to the stock is the Fidelity Consumer Staples ETF (FSCA), where WMT has a 7.11% weighting.

Meanwhile, there isn’t a true grocery solution available to investors. Using Noonum’s concept explorer, we quickly identified a universe of securities with exposure to grocery deliveries and found some interesting options:

  • SpartanNash (SPTN, +0.26% last week) - distributes groceries to independent and chain retailers
  • Weis Markets (WMK, +0.75% last week) - small-cap food retailer with ~200 stores across the mid-Atlantic

Instacart’s expected 2022 IPO will provide another outlet for exposure to online food delivery.

Groceries might not seem like the most alluring space, but healthy dividends and pricing power make this group worth a look in a rising rate environment.

Gold miners – gold as a hedge against inflation and as a source of stability when volatility surges is a story as old as time.

Producers of the metal, gold miners, tend to trade as a levered play on the price of gold. As gold goes, so go the stocks of companies whose margins hinge on its price.

The Russia-induced market turmoil sparked a surge in gold, with the GLD ETF adding 1.9% last week. Meanwhile, the VanEck Gold Miners ETF (GDX) was one of the market’s best performing groups, adding 5.8%.

Find it with Noonum: this theme is littered with small and mid-cap stocks that are often hidden to investors.

The junior gold miners (GDXJ) typically trade with even more beta relative to gold than their senior parent (GDX) as the juniors feature smaller companies with less cash flow cushion.

Using Noonum to build a gold miner index, we can quickly find a wide breadth of companies of varying market caps.

Amongst the smaller names, DRDGold (DRD) is a South African miner that posted a 5.3% gain last week.

What struggled?

Sports betting – if you’ve opened a browser or turned on the TV in the last several months there’s a good chance you’ve been inundated with gambling promos.

All that spending to acquire customers and gain market share comes as an increasing number of states have moved to legalize gambling. But rising costs have taken a toll on the bottom line for companies in the space.

DraftKings (DKNG) alone spent over $10M on promos to acquire new customers over the Super Bowl weekend. Investor appetite for revenue growth without rising profits remains nonexistent, as evidenced by the market’s reaction to DKNG earnings as it tumbled 24% last week.

The rest of the space followed suit as the Roundhill Sports Betting and iGaming ETF shed 5.4%.

Recent IPOs – the mass dumping of high growth, high multiple stocks has become the poster child of the de-risking of the last several months.

The Renaissance IPO ETF tracks the “largest, most liquid, newly-listed” U.S. initial public offerings. Given the IPO market of the last year, the fund is concentrated in expensive tech companies that have suffered from a dramatic investor exodus over the last year. The IPO ETF struggled last week (-4.6%) as one of its top holdings, Palantir, was hammered following its earnings release.

Disclaimer: all opinions expressed is the author’s own and nothing contained in this column is intended as financial advice