The West woke up this morning to reports of Russian airstrikes and a general invasion into Ukraine. At a human level, this situation is tragic. There will be loss of life and damage to property across Ukraine while the world increases diplomatic pressure and
new sanctions take their time to work. This latest aggression should not be considered something new, however. It is a continuation of a now decades-long campaign by the Russian government to put a halt on NATO’s expansion eastward and to reclaim territory to which Russia believes it has an ancestral claim. One would think the people of Ukraine might have made the decision to voluntarily “rejoin” their motherland if they shared Mr. Putin’s sentiments. At risk of making too light of a serious
situation, Putin’s obsession with Ukraine is reminiscent (pun intended) of Pepé Le Pew’s relentless pursuit of the cat. In both cases, the pursuer seems unable to get the message their advances are unwelcome.
As long as the crisis remains contained within Ukraine’s borders, the economic impact and financial market impact will likely be limited to investors temporarily de-risking portfolios out of fear of the unknown. Consider it one more
pinhole in the bag allowing markets to release some upward pressure on stock prices. This is a continuation of what has already been happening since the beginning of 2022 and creates opportunities for those with uninvested cash to rebalance stock portfolios or bank some harvested losses for the future for taxable investors. It's also a good reminder of why cash needed for spending in the near term (i.e. the next 10 years) does not belong in a stock
The other immediate impact is already being seen in energy price increases (oil, natural gas, etc.). This too basically amounts to a continuation of the existing inflationary pressure seen across economies in the last 18 months. The
difference here is this additional pressure actually is coming from anticipated supply chain issues instead of overly loose monetary policy. The uncertainty of this new conflict could complicate the Fed’s timing for raising rates here in the United States this year. We will have to wait and see if they change course at all.
The bottom line here is, despite there being an additional source of uncertainty, markets are incorporating the new information very quickly. At all levels (geopolitically, economically and within the broader market), this amounts to a continuation of trends
already in progress before this week and is not a cause for drastic, reactive change in portfolio strategy. On an even more zoomed-out view, what’s happening in Eastern Europe is a continuation of the history of the 19th, 20th and now early 21st Century’s story. Markets have proved resilient through past crises, and I do not yet see a reason to doubt that will be the case now.
Here is a link to an
article for deeper insight into how one of our key portfolio management partners – Dimensional Fund Advisers – has built resilience into the strategies we utilize.
Thank you for your trust and your time.
Adam Broughton, CFP®, CPWA®