Playing Defense in Turbulent Times

By Jeremy Wallace and Andrew Hart

Recently, we overheard two people talking about the NBA playoffs, which are currently underway. While praising their favorite team’s defensive performance, one of them said something that stuck with me: “Defense wins championships.”   

What a great line! Defense wins championships. The reason this stuck with me is that we’ve been thinking about defense with the markets recently. As you probably know, market volatility has been persistent since the middle of January. The S&P 500 has moved in and out of correction territory for the past two months, and the NASDAQ is technically in a bear market. (A “correction” is defined as a 10% drop or more, while a “bear market” is a 20% drop or more.)

As you can imagine, this sustained volatility has a lot of investors concerned for the future. And make no mistake: it’s clear that we are living in turbulent times right now. Some analysts are warning of a potential bear market across the entire stock market; some economists, meanwhile, are even forecasting the possibility of a new recession.

No one enjoys investing during times like these. But as your financial advisors, we decided to write this letter to assure you that we have a major advantage: We don’t have to suffer from turbulent times. Because we can play defense with your portfolio.

And defense wins championships.  

Let me explain by quickly recapping why the markets are so volatile. The various reasons are all interconnected, so we can untangle the knot of events fairly easily.

On Monday, April 25, health authorities in Beijing rushed around the city to conduct as many COVID-19 tests as they could. By the end of the day, nearly 3.7 million people were tested. Their goal? Identify and quarantine every infected person – so they could avoid the city-wide lockdown that nearby Shanghai has been dealing with for weeks.  

This matters because the world depends on China for a lot of things: Food, rare earth metals, computer chips, cars, steel, plastics, etc. The worry is that if China goes on lockdown again, the production of all these items will plummet. That would throw a major wrench into global supply chains, which are still struggling.  

This is something the world can ill-afford, especially given the war in Ukraine. Much of the world depends on both these countries for the goods they need. Wheat and neon gas from Ukraine, for example. Oil and natural gas from Russia. Thanks to this conflict, and due to the sanctions imposed on Russia as a result of it, it’s now not only more expensive to buy certain items. It’s more important to ship them, too.  

All these supply chain issues have contributed to rampant inflation. For example, take something as simple as eggs. Russia exports a huge percent of the components that go into agricultural fertilizer. When costs increase for farmers to buy fertilizer, the price of corn goes up. When the price of corn goes up, the price of chicken feed goes up. When the price of chicken feed goes up, the price of raising chickens goes up. That leads to higher-priced eggs, which is compounded by higher oil prices making it more expensive to ship those eggs to market, and…well, you get the point.

Understanding how world issues, like COVID and war, contribute to supply chain problems makes it easier to see how they contribute to inflation. What does inflation have to do with the stock market?  Simple: Inflation doesn’t just affect consumers. It affects companies, too. During high inflation, it becomes more costly for companies to produce the products they sell. They can – and usually do – raise their prices to compensate, but this can backfire if consumers go elsewhere. Either way, the company’s profit margin suffers – which means they return less value to shareholders. Shareholders, in response, sell stock, driving the price down. These are the reasons we’ve seen volatility in the market – and why it’s likely to continue. 

These are indeed turbulent times. But here’s the good news. If you look closely, nothing we’ve just explained is new. We’ve been dealing with COVID since 2020; with inflation since 2021. In the last two years, we’ve lived through both a bear market and a recession and come out on the other side. We’ve been reading about supply chain issues for months; trade issues with China for years. The sources of today’s volatility are largely the same as yesterday’s.  

Which means we know exactly how to deal with it.

As you know, when COVID first hit, we immediately moved to “play defense” with your portfolio. We accepted that growth isn’t the objective anymore – now it’s preservation. Over the years, we’ve honed our tactics to move to defense whenever the situation demands. We will continue to monitor the situation, but we’re prepared for the possibility of a bear market. Would we rather always stay on offense, seeking to find new opportunities to grow? Of course. But sometimes, the best way to move forward is to keep yourself from moving backward. Sometimes, avoiding market pain is the best possible gain. Using technical analysis, and systematic rules we know when it’s time to buy and when it’s time to sell, defense will be our objective whenever conditions warrant it.  

Because defense wins championships.  

As always, thank you for your continued trust in our team. If you ever have any questions or concerns about the markets, don’t hesitate to let us know!          

About Jeremy

Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and  he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.

About Andrew

Andrew Hart is co-founder and chief planning strategist at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Andrew has 15 years of experience in the financial industry and strives to provide new and better strategies and processes to improve his clients’ lives. Andrew graduated from Wittenberg University with a bachelor’s degree in business management and holds a certificate in financial planning from Georgetown University and the CERTIFIED FINANCIAL PLANNER™ certification. When he’s not working, you can find him enjoying the city of Lexington, Kentucky, teaching at the University of Kentucky’s Financial Planning program, and spending time with his wife, Susan, twin sons, George and Ted, and daughters, Merritt and Philippa. To learn more about Andrew, connect with him on LinkedIn.