Market Update: Ukraine Conflict
A quick note from The H Group…
With Russia’s decision to invade Ukraine, markets are experiencing increased volatility as they try to price in the geopolitical fallout. We do anticipate volatility may remain high until there is a better understanding of how far Putin’s plans may span and the extent of which sanctions may be applied by the West.
Historically, equity market corrections have been common during periods of military conflict that involve world powers. However, market damage has tended to be short-lived and in the magnitude of a typical market correction (down 10% to 20%). In most cases though, recoveries have also been relatively swift, and there has not been as much direct, long-term economic impact as one might fear. Looking at current market conditions, a correction has been underway since January, mostly due to interest rate fears, but also due to the possibility of Russian military action in Ukraine.
Aside from the terrible human cost, it’s assumed that any economic destruction from this conflict may be localized. The Ukraine economy is not well-developed from a financial market standpoint, although it has begun to access global bond markets to some degree. Russia is more heavily represented in mainstream emerging market bond indexes, with weightings in the 3-5% range, while Ukraine has about half that weight (based on USD-denominated and local currency debt, per Morningstar, as of 2/24/2022).
Of course, if there is an escalation of conflict, Europe and other regions could see far higher volatility due to the uncertainty it brings. In addition, side effects such as crude oil supply shocks leading to higher prices have historically tightened financial conditions. If those tighter conditions persist, it could modify some of the Fed’s future plans, with a possible impact on the pace and magnitude of interest rate increases this year.
Once again, one of the most important antidotes to portfolio volatility is diversification, especially regarding macro allocations between stocks and bonds. As you consider your overall allocations in light of income needs and other projected cash flows, please don’t hesitate to contact us if you have concerns and we’ll be happy to discuss your overall positioning.
We wish the very best for you and your family and we want to thank you for your trust in us and for your business.