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The External Variable Emerges

The catalyst to a stock market correction is often an unpredictable event, yet the occurrence of a market correction is not unexpected. As we recently wrote, market corrections (defined as a decline of 10% or more from a recent peak) occur on average about once every two years and are an inevitable part of investing. While corrections appear to be damaging in the short-term, corrections can be positive in that they adjust asset prices and provide buying opportunities at lower prices.


Approximately 8 weeks ago, the Charter Oak 2021 year-end client letter outlined our expectations for 2022 as follows: 


“In general, we think it most likely that in the coming year: (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen, (c) corporate earnings continue to advance, (d) the Federal Reserve begins draining excess liquidity from the banking system, with some resulting increase in interest rates, (e) inflation subsides somewhat, and (f) barring some other external variable (which can never be ignored)  equity values continue to advance, though at somewhat less than the blazing pace at which they’ve been soaring since the market March 2020’s market trough.”

We then cautioned that our 2022 expectations were not a market forecast, but rather simply the more likely outcomes based on what was known at the time of writing, and then we stated:

“Regardless of 2022’s outcome, our recommendations will be unaffected, because our investment policy is driven entirely by the plan we’ve made, and not at all by current events.”

This week’s eruption of the Russia/Ukraine conflict is most certainly a case of the external variable: a potential factor that can never be ignored, and the investment policy of a goal-focused, plan-driven, long-term successful investor is best to be unaffected by it


Russia’s invasion of Ukraine is related to protecting Russia’s energy interests, which is the lifeblood of the Russian kleptocracy. Russia supplies 40% of Europe’s heating fuel in the form of natural gas via two aging pipelines, one of which runs through Ukraine. Ukraine has been demonstrating increased ties to the West and Putin could not allow this to happen, given how important energy exports are to Russia’s economic security. (For more, see Lukas Alpert’s essay on MarketWatch.)


These tragic humanitarian events are sadly not unprecedented. And while we cannot understate the current geopolitical and social impact of Russia’s actions, history of other similar events tells us that the impact on economies and markets will likely be modest. Historically, the average total stock market return 6 months from an event is 5% and the average total return 1 year from an event is 9%.


“All past declines look like opportunities and all future declines look like risks. It’s one of the great ironies in investing. But it happens for a reason: when studying history you know how the story ends, and it’s impossible to un-remember what you know today when thinking about the past. So it’s hard to imagine alternative outcomes when looking backward, but when looking ahead you know there are a thousand different paths we could end up on.” 

– Morgan Housel


As always, Charter Oak advisors have been and will continue to monitor your portfolios as this fluid situation unfolds. Many of you will receive trade confirmations in coming days as we take advantage of rebalancing opportunities presented by this most recent correction. We remain committed to our investing discipline, knowing that the only reliable way to capture the full long-term returns from investing is to ride out these frequent but historically always-temporary declines. It is a pleasure and privilege to serve you and to keep your best interests at the forefront.