Just because a company is executing well, doesn’t mean its shares are immune from larger events.
Even if a company is executing well and reporting strong results, its shares can fall based on larger issues that have nothing to do with it.
So-called systemic risk is an ever present concern, and one that has made its presence felt significantly over the past two months between high inflation, interest rate hikes and the Russian war on Ukraine.
The Action Alerts Plus team noted the heightened risks of geopolitics several weeks ago, immediately prior to Vladimir Putin’s invasion.
“The stock market does not like uncertainty,” the AAP team wrote, adding “and the Russia-Ukraine crisis is certainly stoking near-term unease.”
Whether imminent or active, war creates massive uncertainty across the market. The truth is, whether you are in a bar fight or launching the 21st Century’s first land war in Europe, once violence breaks out there is no way to control what happens next, as the Russians and many pundits who expected a quick end to the conflict have found out.
The AAP team wrote the comments in the wake of strong earnings reports from several of the companies in its portfolios. They included Walmart (WMT) – Get Walmart Inc. Report, Cisco (CSCO) – Get Cisco Systems, Inc. Report, Applied Materials (AMAT) – Get Applied Materials, Inc. Report and Nvidia (NVDA) – Get NVIDIA Corporation Report.
In the immediate aftermath of the start of the war, all of the shares fell, along with the broader market. Now, several weeks later, Applied Materials is off about 10%. Cisco is slightly lower, but trading in a very tight range. Nvidia is up slightly and Walmart, whose discount model is seen benefiting in times of high inflation, is up more than 10%.
Systemic risk and uncertainty can have an outsized impact on stocks that have seen big gains.
Investors will typically oversell those stocks relative to their strength, as they respond to market jitters overall. The challenge is that, when it comes to overbought companies, they will lose their value too… but they won’t get it back. Those losses will stick.
And hurt.
