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The human toll of Russia's invasion of Ukraine is obviously the most important aspect of this crisis. We're keeping that in mind as we turn to the world of investing and money. And what a volatile time it is in that world. The U.S. stock market staged an amazing comeback last week after initially selling off on the deteriorating Russia/Ukraine situation, then rallied back on optimism that the conflict may only have a minimal impact on the U.S. economy. The turnaround came after President Biden announced targeted sanctions Thursday afternoon that did not affect Russia's oil and gas exports or block Russia's access to the SWIFT financial system.
Western leaders rolled out financial penalties against Russia for its invasion of Ukraine, with sanctions targeting major banks, including companies and the assets of Russian oligarchs. Last Thursday, President Biden announced that the U.S. Treasury would target nearly 80% of all banking assets in Russia. The sanctions target Russia's two largest financial institutions, the public joint-stock company Sberbank of Russia and VTB Bank. It also announced blocking sanctions on three additional Russian banks. Blocking sanctions freeze those banks' assets in the United States, prohibit U.S. individuals and businesses from doing any transactions with them, and shut them out of the global financial system. It also announced debt and equity prohibitions against major state-owned private entities, meaning that U.S. investors are not allowed to lend to these companies or invest in their common stocks.

Jason Trennert is the chairman, CEO, and chief investment strategist of Strategas, an institutional brokerage and advisory firm serving clients in 45 states and 25 countries across the world. Prior to co-founding Strategas in 2006, Mr. Trennert was the chief investment strategist and a senior managing director at International Strategy & Investment (ISI) Group. Mr. Trennert is known as one of Wall Street’s top thought leaders when it comes to markets and economic policy. He is a regular guest on several business news programs, including CNBC, CNBC Italia, Fox Business News, and Bloomberg TV, and is the author of three books about investing and the investment business.

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Investors are facing the triple whammy of geopolitical conflict with Russia and Ukraine, persistent inflation, and rising interest rates. For individual investors, the drop has been a wake-up call to the fact that we can't control the market and economic forces. But for institutional investors, who have hundreds of billions of dollars on the line, it's even more daunting. They are investing our money too. Strategas Investments advises many of the world's largest investment and hedge funds, and invests on behalf of its own clients as well. And Jason Trennert is the co-founder and chief investment officer of that firm, and our guest on the Express this week. Thanks for joining us.
Jason:
"Thank you for having me. Appreciate it."
Caleb:
“Jason, we’re speaking on Thursday, just as Russia has reportedly invaded parts of Ukraine, and we’ve seen a broad sell-off in stocks and a spike in commodities over the last several days. How are you counseling your clients amid this uncertainty?”
Jason:
"Well, it sounds easier than it is, but we're advising people not to panic. Number one, to focus on the fundamentals and first principles, which would largely be, one, what are the implications for the economy or does this increase the chances of a recession. In our opinion, that answer is 'no.' Secondly, what impact might this have on earnings? And thirdly, what impact might this have on interest rates and monetary policy? And I think in all of those instances, I can't say that things are a lot different today, on Thursday, than they were a week ago. There's clearly something discomforting about what's happening in Russia and the Ukraine, and we want to be sensitive to the plight of the people there. But by the same token, I'm not sure it's going to have a significant impact on the U.S. economy."
Caleb:
"The U.S. economy, for all intents and purposes, was sort of in a healing pattern. Unemployment has been dropping. We know that we may have peaked in terms of economic growth coming out of that deep downturn we had amid the pandemic. But things in general were looking up. And corporate earnings, by and large, have been strong, even though investors may not be that enthusiastic about them given growth rates. But this is that wrinkle that we just can't avoid, and this has happened in the past. The conflict in in Ukraine and Russia, does that resemble anything that we've seen in the past over the last several decades that you can compare it to?"
Jason:
"Sure. I think, sadly, there are precedents for this. I think the Soviet Union invading Afghanistan in 1979. You had the first Gulf War, you had 9/11, you had the second Gulf War. There are a lot of events again, sadly, that have happened that appear to change everything. And I think as financial analysts, the hard part, of course, is taking the emotion out of it and focusing on what are likely to be the fundamentals from a longer-term perspective. I do think this is potentially bigger to the extent to which… I think, once combined with our changing relationship with China, it does appear as if we're entering a new Cold War of sorts. So, I don't want to minimize this. By the same token, there unfortunately are many precedents for dislocations of this type."
Caleb:
“Well, it’s so natural for investors to want to sell when faced with geopolitical uncertainty, especially in a situation like this where we do not know the endgame. But you and your clients have to put money to work somewhere to capture alpha. What do big investors do at times like these? Do they stay the course, do they move their money around? What are you seeing and what are you advising?”
Jason:
“Big investors have… one disadvantage that that the average investor doesn’t have, which is that their job is on the line, and they’re often measured in relatively short time horizons. Which is to say, ‘How did you perform this year versus an index?’ Retail investors or individual investors, I think, have an advantage to the extent which they can arbitrage time horizons. They can have longer-term time horizons, equity stocks, or long-duration assets. So, it really doesn’t make a lot of sense to be looking at them on a yearly basis. And yet, that’s the nature of the money management business.”
"So, in some ways, it's easier to answer the question for the individual investor because if they're focused on buying good companies that they believe will be around for a long time, in my opinion, they'll do just fine. The biggest mistakes tend to be in trying to time the market. And the reason why that's a mistake, often, is that you have to be right twice. You have to be right when selling, and then you have to be right when buying. And and the chances of doing that effectively, in my opinion or just based on my experiences, are pretty low for anyone."
“Institutional investors also, generally speaking, have to be invested. They don’t have the luxury of really going to cash. It depends on the institution, but a big pension plan, especially when cash is yielding zero, it’s really not an option. You have to be invested someplace. So, to answer your question specifically, for those clients, we’ve been telling them for a while, and I think we do still feel good about this today, that investors generally want to have a value orientation rather than growth. So, we’re advising clients to be overweight… energy, basic materials, industrials, and financials. We have also been telling him to have more of a small cap bias rather than a large cap bias. And then we’ve also been telling them for a while that we think inflation is not as transitory, perhaps, as everyone hopes it may be. That there are structural issues in terms of inflation that that are likely going to keep upward pressure on interest rates.”
Caleb:
“We’re already dealing with inflation at a 40-year high and the prospect of rising interest rates when the Fed meets next in March. Do you think what’s going on right now with Russia & Ukraine may change the Fed’s tune as we approach that meeting?”
Some investors believe that the shock and uncertainty of a war in Europe could discourage the Federal Reserve from being too aggressive about hiking interest rates when it meets next month. Expectations are for the Fed to hike the overnight lending rate anywhere from one quarter of a point to half a point. The Fed is also expected to announce that its bond buying program has officially tapered off.
Jason:
“I don’t think so. It’s largely because inflation is… it’s not just a little bit beyond the range of what the Fed would find acceptable. It’s well beyond the range. So, CPI, as you know, is running at about 7.5%. The target is 2%. The Fed’s favorite inflation measure is something called the core PCE—core meaning you take out food and energy. That’s still up about 4.9%. So, it’s not appropriate for the fed funds rate to be zero when inflation’s running somewhere between 5–7.5%.”
"So, I think the initial meetings, candidly, it's not going to change much. The Fed is going to pursue lift off in terms of interest rates. But I also think it may be in the expectations of further rate hikes later in the year and even into 2023 that may be affected, depending on what the economic data look like and also whether inflation does indeed start to ebb. I don't think that's a layup, but I think the Fed probably wants to give itself some time, especially given some of the geopolitical tensions that we're seeing and wants to start the process. But it will probably tread maybe a little bit more carefully, a little bit more slowly, than perhaps people thought a week ago or two weeks ago."
Caleb:
"I want to return to something you said about advising your clients to shift more towards value & away from growth. Growth has been the story for 20+ years, and every time it looks like value may take the upper hand and may lead the market for a while, we see this quick snap back to growth because investors just want that growth. They want these these big growing large caps or these new companies that have really emerged over the last 10 to 12 years and follow their upward trajectory. How long do you think we're going to be in this period where value is actually leading market gains? Energy, financials, some of these other areas? How long do you think that's going to last?"
Jason:
"It could last a number of years. These trends tend to move in secular fashion. I think it's been about 11 years that that growth has outperformed value, which is an eternity. That's almost a career. That's half a career or something on Wall Street. The big change, though, I think really has to do with interest rates and inflation because… really, inflation and interest rates have been coming out broadly for about 40 years. And it seems pretty likely now that that string is broken, that a combination of fiscal and monetary policy has made it so that you're unlikely to get a snap back in inflation to something that's more palatable politically and economically."
Global inflation could hit an all-time high when the United Nations comes out with its latest monthly snapshot on Thursday. Consumers are already grappling with soaring food costs after drought and labor shortages slashed harvests around the world at a time of rising demand. Now, prices of grains and cooking oils have taken another powerful leap forward following the invasion of Ukraine.
“So, that changes… obviously, interest rates are a pretty important element of discounting future cash flows. And I do think that high-quality growth companies or growth at a reasonable price can probably do well in this environment. But I have to say, I’m still quite skeptical and cautious about high-flying tech companies that are trading at a multiple of sales as opposed to a multiple of earnings or cash flows, right? So, you always want to be careful with those, but it’s somewhat justifiable when interest rates are near all-time lows. It’s harder to make those investments in those high-flying companies when interest rates are rising.”
Caleb:
“Another trend that we’ve seen over the past several decades is the U.S. has really led equity returns, when you look at the global landscape. That’s not been the case in the first few months of 2022, but there’s a lot going on right now. Do you think that’s going to be the case going forward? Do you think the U.S. will lag some of the other major markets outside of our borders? And if so, for how long?”
Jason:
“It’s a good question, and I think it’s another version of growth versus value, I would say, because the U.S. is a very growth-y market. About 28% of the S&P 500 is the technology sector, and it’s not something… it’s a huge competitive advantage the United States has. But again, investing is largely about what you pay, what you’re getting for what you’re paying. And I do think developed international economies have the opportunity to perform better because the mix of industries that they represent, particularly energy and financials, are more represented in those markets. Now, the geopolitical tensions between Russia and Ukraine make that much harder now than it might have seemed a couple of weeks ago. I do think that, in terms of emerging markets, you do want to continue to focus on commodity exporters. So, a country like Brazil, for instance, as opposed to a commodity importer, which would be China or India. I think those are countries that are going to continue to have a hard time because of my outlook on inflation, because my outlook on commodity prices.”
Caleb:
"Aside from the geopolitical conflict that we're experiencing now. There were plenty of risks out there in the market. But what wasn't being looked at in your opinion? What were people not focused enough on before all of this came up between Russia and Ukraine? Were there any risks out there that we just weren't seeing? Because I know by following your research for many, many years, you talked to so many people, both in the United States and around the world, and you pick up on some nuances that a lot of the mass financial media and other folks just don't pick up on. Was there anything out there that you thought might be lurking that could be an issue going forward?"
Jason:
“I think the biggest thing is the potential for long-term interest rates to rise. The thing that I think worries me is that we don’t really know what the true risk-free rate is for the 10-year Treasury note because the Fed is still buying them, and has been buying them so aggressively that the Fed’s balance sheet is close to $9 trillion.”
"And I think there's a general sense that long-term rates can go up a little bit, but they won't go up all that much. Meaning rates can either bet 1.95% right now, maybe they'll go up to 2.3% or 2.4%. That worries me because it would not be surprising me if interest rates went up a lot more than that, given where inflation is. And we won't really know that until the Fed starts to shrink the size of its balance sheet, which probably won't be until April or May at the earliest. So, to me, that's one risk that's that's out there. I hope it doesn't happen, but there is a chance that long-term interest rates back up much more than people suspect, and that obviously will put some significant pressure on multiples and what people are willing to pay for stocks."
Caleb:
“Since we’re Investopedia, we have a lot of listeners here who are understand how long-term interest rates can affect equity returns. But just spell this out for us as if I was explaining it to my mom. Fundamentally, why is that a problem, and why should individual investors, 401k investors, be worried about that? How can it manifest itself in their portfolios?”
Jason:
“Well, it really is… it’s the time value of money. So, a very simple way of determining what the value of anything is is looking at the future cash flows and then discounting them back to today based on the interest rate associated with those cash flows. So, as interest rates rise, the net present value, the present value of those cash flows, declines.”
"And so, again, it's one thing when interest rates are close to zero or very low, that net present value can be very, very high because you're not taking much of a haircut from a higher cost of capital. As interest rates rise, though, the net present value declines. And so that's really the risk. Stocks, again, are long-duration assets. And so, largely, their worth is determined by their earnings, profits, cash flows, and interest rates."
Caleb:
“We’ve come out of this period in 2021, and the better part of 2020 post the worst part of the pandemic, where it was the everything rally, Jason. Everything was going up. Cryptocurrencies were going up. Individual stocks were going up. Even commodities in some respect were going up. So, you couldn’t miss. Whether you were a stock picker or an index investor, it was a golden era for about a year and a half there. That’s not the case anymore. So, what kind of a market is it now going forward? And how should investors, whether you’re a retail investor like me, or whether you’re an institutional investor like a lot of your clients, be thinking about choosing the things that should go into their portfolios and investing for the long term?”
Jason:

“Yeah. So, I would say there’s two things in this… and I’ll just admit off the bat, it may sound a little self-serving, but also it happens to have the benefit of being true, in my opinion, or I believe it. So, I do think that there has been a general sense that passive investing is the only solution for individual investors because of how inexpensive it is. That makes a lot of sense in a period in which interest rates are very low and in which the dispersion of returns between stocks is also very low because interest rates are low. I think as interest rates increase, what you’re going to see is the dispersion of the returns from stocks within these indices go up a lot, which is just a fancy way of saying good old-fashioned stock picking, in my opinion, is going to be more important as interest rates rise.”
“And so you want to be a little bit careful and in some of the, let’s say, just the standard passive investments that people have had, like the S&P 500, because generally speaking, people tend to buy those for risk mitigation strategies. But as we know, there are five stocks in the S&P 500 that make up more than 20% of the index. So, it’s not as attractive. Passive investing isn’t as attractive, I think, as it once was. And I think trying to find good stock pickers is going to be critical.”
“I’d also say that I do think the era of free money, or close to free money, is over. And inflation is going to be a significant shadow. It’s going to cast a very significant shadow over companies operations, and it will reveal also how managements deal with their supply chains, how they deal with pricing. It’s going to be more challenging from a management perspective and will reveal, I would say, the strong from the weak, if you will, in terms of some of these issues that we haven’t had to contend with in a long, long time.”
Caleb:
“Yeah, younger investors have never, ever lived through an environment like this. So, this will be a new and interesting world to live in. So, in addition to the great research you provide and you do manage money as well, you’ve launched two new ETFs at Strategas. Tell us about those, and what are they positioned for and who are they for?”
Jason:
"Yeah. So, this is a way… So, as you said, our research is for institutional investors. We have created a lot of baskets throughout the years, in some ways, for diagnostic purposes to see whether our strategies and our thoughts were working. In some cases, we would allow our institutional clients to invest in some of these strategies. We can't distribute our research to individual investors, but this is a way in which individual investors can get access to our research by buying our funds, and we have two of them."
“One is the Strategas Macro Thematic Opportunities fund, where we choose three or four of our most high-conviction themes. And right now, those themes are higher inflation, quantitative tightening, or return of travel & entertainment for business. Those are three big themes that are in that portfolio. That’s SAMT, that symbol. We also have a Strategas Global Policy Opportunities portfolio, which focuses on the benefits of lobbying. And what we found is that companies that do spend a lot of money on lobbying, relative to their size, tend to outperform. There’s a sadness, a little bit, in that, but it works. And we’re looking for companies… we look through Senate and congressional filings to see the companies that are the most intense of lobbyists. And as I said, they generally tend to win over time.”
Caleb:
"The research that you provide and the insights you and your team provide are always top notch, and that's why I've been following you for so many years. Jason, you know that Investopedia is a site that was built on its investing terms. So many people have come to us to learn about investing or finance for the first time. You've been in this game a while. What's your favorite investing term and why? Which is the one that really speaks to your heart as an investor and as someone so steeped in the markets as you are?"
Jason:
“Even I’ve been doing this for 30 years, I use Investopedia probably more than I’d like to admit, and I probably… you would think if I were doing this for 30 years, I wouldn’t have to console Investopedia, but I do all the time. My favorite term probably is just maybe the one I got started with, which was really important in the early 80s, and it may become important again, which is the TED spread. That’s the difference between three-month LIBOR and three-month Treasury bills. And the reason why it’s important… again, it was really important in the late 80s and early 90s, people were obsessed by it, but it rhymes, and it’s also an important indicator of when they’re stressed and the system. So, I’ll say that’s my favorite investing term.”
Caleb:
"I love it, and you're the first person to bring that term on to the Investopedia Express, but a very popular term on Investopedia, and I think one that's going to come around again as what was old is new again, and these things do go in cycles. Jason Trennert, the chief investment officer at Strategas Investments. Thanks so much for joining the Express. We really appreciate it."
Jason.
"Oh, it's my great pleasure. Thank you."
It’s terminology time. Time for us to get smart with the investing and finance term we need to know this week. And we got a special one this week, and it comes from my momma, the great Jerilyn Silver in Santa Fe, New Mexico. Jeri suggests SWIFT this week, and she actually made me explain it to her over dinner the other night. SWIFT stands for the Society for World Interbank Financial Telecommunications. It’s a member-owned cooperative that provides safe and secure financial transactions for its members. This payment network allows individuals and businesses to take electronic or car payments, even if the customer or vendor uses a different bank than the payee. SWIFT works by assigning each member institution a unique ID code that identifies not only the bank name, but its country, its city, and its branch. SWIFT is based in Belgium. It’s used by more than 11,000 banks and financial institutions in more than 200 countries and territories, including Russia. It handles 42 million messages a day, facilitating trillions of dollars worth of transactions. Russia accounted for 1.5% of Swiss transactions in 2020, according to the Financial Times.
The White House announced Saturday evening that the U.S. will be disconnecting some Russian banks from SWIFT in partnership with the European Commission, France, Germany, Italy, the United Kingdom, and Canada, and they're imposing restrictive measures that will prevent the Russian central bank from deploying its international reserves in ways that undermine the impact of the sanctions. Cutting Russia off from SWIFT completely will make it harder for Russian entities to process transactions and do business beyond its borders. Russia does have its own messaging system that it could use with China, although it would not be easy to switch over from SWIFT. And don't forget, many European countries, especially Germany, are still buying Russian commodities like oil. If you take Russia off of SWIFT that will cut the flow of commodities just as Europe is facing inflation at a 40-year high. It's complicated, but that's a very good suggestion, mom. I'm sending you some socks, which I'd like to see you wear at our next family reunion.
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