The attention of the world is focused on the Russia/Ukraine conflict. This geopolitical clash is concerning from several perspectives, particularly the potential human tragedy. In light of the interconnectedness of our global communities, however, it is important that we also examine the possible impact of this event across the economic landscape. With the S&P 500 in correction territory (down just over 10% from its recent high) and understanding that news headlines and the associated financial market reactions can be alarming, we have outlined some points for perspective on the situation and some practical, rational steps to consider during this volatile period.

Key Issues

Our primary economic concern is additional inflationary pressures on top of already high levels of inflation. Bloomberg News helps put this in perspective. Russia is the third largest global producer of oil and provides Europe with nearly 50% of its needed natural gas supplies. Ukraine is also a major supplier of natural gas and an important transit location for oil and gas flowing into Europe. Additionally, Ukraine holds around 10% of the world’s iron ore reserves and holds the largest deposits of uranium, manganese and titanium in Europe. Disruptions to the supplies of these key commodities because of the conflict along with potential sanctions on Russia are likely to continue pushing energy prices higher in the short term. West Texas Intermediate crude has jumped about $7 today to nearly $100 a barrel as of this writing. With the Consumer Price Index already running at 7.5% year-over-year in the U.S., higher energy prices will likely exacerbate the impacts of inflation on households globally and potentially slow the overall economy marginally.

Ignore the Noise and Keep Perspective

Tuning out the noise and not initiating any drastic investment actions is the best approach for the following reasons:

• Geopolitical selloffs are typically short-lived. As illustrated in the chart below from Vanguard Geopolitics and Market Behavior (2/23/22), stock market pressures in the face of some major historical geopolitical events have been both short-lived and modest in terms of drawdown, with positive forward returns.

• The U.S. economy remains robust. Leading economic data from Bloomberg News — such as new orders for consumer goods, jobless claims, retail sales, building permits, and the ISM Manufacturing and Services surveys — point to expanding and robust economic growth. The Russia/Ukraine conflict could slow this activity modestly, but we do not think it will be enough to significantly impact U.S. economic growth or corporate earnings.
• The Russian economy is 1/20 the size of the U.S. and 1/15 the size of China, and Ukraine’s is even smaller. This Bloomberg data explains why conflict isn’t likely to derail the global economy.

Reasonable Actions to Take Now

• Focus on your longer-term financial goals. Recognize the Russia/Ukraine conflict is unlikely to significantly impact your longer-term goals if you remain focused on executing your plan.
• Stay diversified. It has been tempting to sell bonds recently given interest rate volatility, but events like this highlight the reason to stay patient and diversified as bonds typically hold up well relative to stocks and other risk assets during periods of uncertainty. Also, diversification within equities is important. Large technology stocks have been in favor for several years, which may have led some investors to hold lesser amounts of diversifying asset classes like energy, utilities, and consumer staples than warranted. Maintaining a well-diversified portfolio helps weather short-term, unexpected storms like geopolitical events.
• Maintain strategy and discipline. In many investment strategies, we are actively looking to harvest losses in positions that are down and upgrade to higher-quality positions we prefer. This pruning process supports tax-efficiency and improves portfolio quality without changing the overall risk/return profile of those portfolios. Also, basic rebalancing is something to consider regularly, especially during periods of volatility. With stocks down, it is likely a good time to trim positions that have done well and add to positions that have been hurt most during this period of volatility. This process maintains discipline and reduces emotional decision-making during a period when emotion can run high.

Equity market corrections are normal and needed so that prices stay fair. Volatility is likely to continue in the shorter run, as traders continue to assess the Russia/Ukraine conflict along with a less friendly Federal Reserve given high levels of inflation. Historically, mid-term election years have been more volatile. For now, we think the impacts from the Russia/Ukraine conflict may lead to even higher short-term inflation, but are likely to have only modest impact on the U.S. and global economy. The U.S. economy is likely to remain robust in 2022, which should support corporate earnings and stock market valuations. Patience, balance and discipline continue to be key in 2022.
 
Chad Roope is Vice President, Chief Investment Officer at Sequoia Financial Group, LLC. Contact him at croope@sequoia-financial.com or visit www.sequoia-financial.com.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.

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