It’s A Whole New World
Russia’s invasion of Ukraine last week marks the largest land invasion and European conflict since World War II so there is no wonder it was viewed with angst worldwide. Our thoughts are certainly with the people of Ukraine as they fight to maintain their sovereignty and independence in what is undoubtedly a very difficult time. This troubling news is leading headlines around the world, and it is important to monitor this situation since the outcome and any further action may have considerable implications for world order and peace. But for now, here in the U.S. the impact is limited and there are other issues more likely to drive markets which investors should focus on, such as corporate earnings, inflation, and higher interest rates.
Global stock markets dropped dramatically last Thursday morning upon news of the invasion. Commodities prices, especially oil, moved much higher and there was a flight to safety with money going into “safe-haven” investments such as U.S. Treasury bonds and gold. However, the dramatic pullback was relatively short-lived, at least domestically, as the major indices clawed their way back and all ended higher on the day. On Friday the markets had their single best day since late 2020 on optimism for diplomatic talks. But despite the gains late in the week, the markets still ended the week slightly lower. The quick reversal and strong follow-through may seem somewhat puzzling given the severity of this crisis. There are a few theories as to why there was such a dramatic rebound, with the most common being the markets were already oversold with both the S&P 500 and Nasdaq closing in correction territory on Wednesday. Also, the odds of a half-point rate hike by the Federal Reserve at their upcoming meeting fell dramatically after news of the invasion broke and it is now highly expected the Fed will only raise rates by one-quarter point. This is viewed very favorably by the markets since higher interest rates are thought to be a hindrance on future growth.
Should we be worried?
Historically speaking, volatile geopolitical events have only caused short-lived volatility in the stock market. Going back to the Israeli Arab War and Oil Embargo in 1973, the average market selloff from a geopolitical event is 12 days with an average drop of 6.5%. Depending upon what occurs in coming days, in terms of global stock markets the worst may already be behind us. What is perhaps of largest worry is what happens with energy prices. Russia is the world’s No. 3 exporter of oil and the No. 2 exporter of natural gas and supplies about 50% of the energy consumed in Europe. Since Western countries are imposing sanctions, one of Russia’s countermoves might be to retaliate by cutting fuel sales. Also worth noting is that Ukraine is often considered to be the “breadbasket of Europe” since it supplies wheat, corn, and sunflower oil to much of Europe, the Middle East and Northern Africa. Agricultural production may not be affected but the ports used to ship these goods are currently closed. The greatest threat from the invasion may not be a prolonged market downturn but rather elevated inflationary pressures from higher energy and food prices.
At this time the U.S. is not directly involved in this conflict but there is some concern we would be pulled into it should Russia continue their aggression and attack a NATO country, which could lead to another World War. Hopefully cooler heads will prevail and there will be peace. The Ukrainian people have shown great resilience with many taking up arms to defend their homeland against the unprovoked hostility. It seems most of the world is on their side in hoping they succeed. In the meantime, life continues for the rest of us and from a market perspective the focus remains on those issues which have the prospect of causing greater impact for investors and savers.
The heightened volatility and market pullbacks experienced thus far in 2022 demonstrate the importance of having a solid income plan supported by “safe money” and not being beholden to stock market movement. This is also a reminder of why money invested in the market is intended for long-term capital appreciation with a time horizon measured in years, if not decades, rather than a few weeks or months. This might be a good time to consider non-traditional investment strategies which can provide growth while reducing downside risk. We believe better days are ahead but if you have concerns about market volatility and world events, we welcome the opportunity to have a conversation with you to review your portfolio and income plan to ensure you feel secure in your retirement.
Have a good week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.