MY TWO CENTS:
Since I started writing MTC well over a decade ago, I’ve seldom used this media to share specific economic or market driven thoughts. However, the recent market volatility and increase in geo-political volatility has inspired me to share some thoughts for our readers to consider.
In our unique position of serving people toward their purpose and highest priorities, we have the opportunity to build deep relationships and engage in authentic and transparent conversations. Sometimes those conversations reveal places where our clients are experiencing fear, uncertainty, or lack of confidence in their plan or conviction with their strategy.
With the news of Russia’s invasion of Ukraine, rising interest rates, increasing inflation, along with a season of elevated, albeit relatively normal, market volatility, I thought an MTC edition sharing some insights would be of value. This confluence of these factors certainly has many of the strategists with whom we work paying close attention to the implications and best way to navigate the outcomes.
Here are a couple of perspectives:
Source: SPECIAL EDITION: Update on Russia-Ukraine Crisis, CIBC Private Wealth, 02-23-22
“It is important to put this crisis in the context of others over the years. In a study of 18 22geopolitical and financial crises since 1940, after an initial decline, the S&P 500 stabilized fairly quickly and was higher a year later two-thirds of the time (see Exhibit 1). In other words, reacting to geopolitical events by disrupting a well-constructed portfolio—with plans to reestablish it “when the coast is clear”—is a strategy that often backfires.
Exhibit 1: Crisis reaction—highly unpredictable (and short)
Analyzing S&P 500 reaction to 18 geopolitical or financials system shocks…
Market direction Day of 1 month later 3 months later 1 year later
S&P 500 up 4 10 11 12
S&P 500 down 14 8 7 6
Median return -2.5% +0.4% +3.3% +6.7%
Source: Ukraine-Russia Geopolitical Risk Analysis, City National Rochdale, 02-23-22
“It is tempting to view the S&P 500’s 10% correction from its early January high as a direct result of the Ukraine crisis. We believe it has only been a secondary factor and that most of the volatility has been driven by high inflation and the resultant policy pivot by the Federal Reserve (Fed). The Russian incursion into Ukraine is a serious geopolitical issue that may become more serious. However, with a three- to six-month view, we believe that the pace of economic and earnings growth and the Fed’s efforts to arrest inflation will be bigger drivers of market behavior than events in Ukraine. One area of potential linkage between the Fed and the Ukraine crisis could be a further jump in commodity prices as sanctions lessen the global supply of Russian energy and metals. We will be evaluating closely whether this transpires and its potential impact on inflation.
For the moment we are staying the course in our investment strategy. However, as risk managers and stewards of capital, our job is to identify the key issues and to have a game plan in place for potential impacts to economic growth, inflation, capital markets and our asset allocation positioning. Barring the worst-case outcome, we see limited negative impact on our positive view for a multi-year expansion in the US and our overweight to risk assets. Volatility in the short term, though, will likely rise until the crisis is over and equities could come under varying degrees of pressure. History shows the impact on equities from geopolitical tensions tend to be short-lived modest on average. Should the worst case unfold, we believe the European economy would be impacted much more than the US, reinforcing our underweight to European equities. Rest assured, we have a game plan to preserve capital should unanalyzable shocks occur that would raise the risks of recessions in the US meaningfully.”
Of course we don’t know with certainty what will be the outcome of these issues on global economics or investing markets. However, we believe that a well-conceived plan combined with a well-bucketed investment strategy can help maintain confidence through uncertainty and volatility. If you’re feeling unsettled, please don’t hesitate to reach out to us!
Make it a great week!
Scott Cousino, CFP®, CEPA®