A new dimension of risk has entered the financial markets with Russia invading Ukraine. It’s not something the markets needed when they were already dealing with heightened inflation and preparing for an expected cycle of interest rate hikes from most of the world’s central banks.
We know this, however, about equity markets in the context of geopolitical risks: they’ve been resilient, much as markets have always been resilient in the face of various risks. We expect the markets to work themselves out, reaching new heights over time and at varying paces. These rises will sometimes be punctuated by sharp declines. This is how it works.
So now is not the time to give up your fortitude. Now is the time to take it all in with a deep breath, knowing that this day would come—and knowing that it will pass, even if we don’t know exactly when that will happen.
Resilience, balance, and diversification continue to help you as an investor to achieve steady growth and absorb the blows of declines when they happen. Meanwhile, if the markets throw your accounts out of balance or if you have cash on the sidelines, it can be a good time to add to your positions and rebalance.
Past patterns: how war and conflict typically affect markets
The common historical pattern has been that global markets weaken as wars approach and strengthen long before they end. For the most part, the markets have been holding to this pattern during Russia’s recent aggressive movements:
- President Putin of Russia has already rattled stock, bond, and commodity markets worldwide.
- This morning with the Russian invasion of Ukraine, U.S. stocks stumbled, with the S&P 500 falling over 1 percent, furthering Wall Street into a market correction.
Geopolitical risks have always been a part of investing in both global and domestic markets. But as we have already mentioned, the markets largely tend to shrug these conflicts off over time.
Source: LPL Research, S&P Dow Jones Indices, CFRA, 01/06/20. Past performance is no guarantee of future results.
This LPL Financial research demonstrates how some major geopolitical events in recent history have affected markets and how quickly those markets tend to recover on average. As LPL Financial Chief Investment Strategist John Lynch stated,
“As serious as this escalation is, previous experiences have indicated it may be unlikely to have a material impact on U.S. economic fundamentals or corporate profits. We would not be sellers of stocks into weakness related to this event, given stocks have weathered heightened geopolitical tensions in the past.”
Expected long-term market implications
It is natural to expect geopolitical instability to affect the stock market. But Ben Carlson, Director of Institutional Asset Management at Ritholtz Wealth Management, pointed out that “during two of the worst wars in modern history, the U.S. stock market was up a combined 115%.”
Source: Mark Armbruster/CFA Institute. Past performance is no guarantee of future results.
If anything, market performance during times of war in the past has shown us that the market tends to be fairly indifferent to human conflict and calamity. In many cases, the S&P 500 stock index rose again just one year after stock-market-shattering crises. History shows that it is typically best for investors to hold their course.
Expected short-term market implications
While patience and sticking to the plan have proven to be successful strategies in the past, the escalation of Russia’s aggression in this crisis is not without possible short-term effects and potential unintended consequences:
- Restrictions on investors’ ability to trade in specific stocks or on certain exchanges
- Potential additional sanctions imposed on Russia
- Temporary market closures impacting all stocks in a certain market for some time
- Equities may continue to fall
- Ongoing supply-chain bottlenecks because of continuing rising prices or shortages of various commodities, including:
- The energy sector, including oil and gas
- Minerals and metals like platinum, nickel, aluminum cobalt, copper, gold, and diamonds
However, there is still reason for calm. In the case of spiking energy prices, many analysts predict they will also decline quickly based on fundamental supply and demand. Cutting off the flow of Russian exports is not in the interest of either Russia, European consumers, or the U.S.
Additionally, the structure of global oil markets has been changing, and the U.S. economy has become less vulnerable to energy price swings in recent years. Edward L. Morse, global head of commodities research at Citigroup and a former deputy assistant secretary of state for international energy policy, projects a decline in oil prices by the end of 2022.
Key takeaways for you as an Investor
Investors in global equity portfolios inevitably face periods of geopolitical tensions and market volatility. While the market appears to be going further down in the short term, history has conditioned markets not to overreact to these kinds of shocks.
We cannot predict when or what kind of market-shaking events will occur, but we can plan for them by staying disciplined and steady. Long-term investors with well-diversified portfolios of stocks and high-quality bonds, whether held directly or through low-cost mutual funds and exchange-traded funds, can expect to ride out this crisis as they have so many others.
These types of market events are not new. As long as we stay the course, we can weather the storm and come out ahead and still on track for your financial goals.
The information contained in this article represents the opinion of Oakwell Private Wealth Management and should not be construed as personalized or individualized investment advice.