By Ronnie Cox, SVP, Investments, Pensionmark
On February 23, 2022, after several weeks of build-up and anticipation, Russia began a full-scale invasion of neighboring Ukraine, launching the largest war to occur on the European continent since World War II. First and foremost, I must acknowledge how tragic and painful this time is for the Ukrainian people, and our hearts and thoughts are with them. As a market observer and investment advisor, it is our job to understand current events and try to distill them in the context of investing for our clients. And while there is significant uncertainty about the road ahead, I’d like to try and put these current events into context and discuss their likely impacts on global economies and markets.
As of this writing, Russian forces have launched a full-scale assault on Ukraine, with attacks against major cities, including the capital city of Kyiv. In response to these actions, the United States, the European Union, and other major western allies responded with a series of sweeping sanctions targeting the Russian financial, energy, and transportation sectors along with direct targeting of Russian individuals1. Global markets reacted swiftly with steep equity selloffs in Japan, the United Kingdom, Germany, Russia, and numerous other countries. In the United States, equity markets opened Thursday morning with steep selloffs as the Dow Jones Industrial Average reached correction (a 10% drawdown from its market peak) territory and the Nasdaq touched bear market (a 20% drawdown from its market peak) territory. Oil markets initially surged with Brent Crude oil futures topping $100 a barrel. The U.S. dollar rallied against most currencies, particularly those in Europe. Although international markets did not fare as well, the U.S. markets began to reverse course as investors digested the implications of Thursday’s fresh round of sanctions and the potential impact on the U.S. economy and businesses. The Nasdaq, which was down over 3% to start Thursday, ended the day up over 3.2%2. With that context in mind, it is important to try to make sense of why the markets reacted in this manner and to highlight the potential risks as we look forward.
Certainly, while anticipated for several weeks, this war in Ukraine was a shock for markets and introduced more uncertainty to an already tense global market. Equity markets typically sell off in times of uncertainty as assets move into relatively safer investments. In Europe, that uncertainty remains extraordinarily high, as the European continent continues to be largely dependent on Russian oil and natural gas. Any additional sanctions against Russia could result in retaliatory supply cuts, forcing much higher energy prices across the continent.
Further, European countries are much closer to the conflict and could be more vulnerable to the war’s spillover effects, including a mass migration of refugees out of Ukraine. The United States appears to be more insulated from the current conflict as the number one producer of oil globally3 and is therefore far less vulnerable to supply shocks than the European continent. While the United States could feel the impact of supply shocks, it has far more tools at its disposal to weather those shocks.
Additionally, President Biden has made repeated assurances that the United States will not engage militarily in the conflict in Ukraine. He has made a clear distinction that the United States would meet its obligations if any NATO ally were invaded, but Russia has shown no signs of moving beyond Ukraine at this point.
Lastly, Biden made clear today that he would do everything in the administration’s powers to limit the effects of these sanctions on the U.S. consumer that may manifest in the form of higher energy or food prices4. These factors appeared to have calmed domestic markets as we saw investor money flow into U.S. assets and domestic markets retrace their losses on Thursday.
With all that said, there is still uncertainty ahead. Vladimir Putin has shown to be a belligerent autocrat with little deterrence. Russia remains a top producer and exporter of oil, natural gas, food, and raw materials. If the Russian government were to retaliate against global sanctions, they could cut these exports and disrupt global supply chains, further aggravating our already elevated inflation situation. Of most concern, Russia is a nuclear power, and Vladimir Putin warned of consequences we “have never seen” if the West intervenes.
Takeaways for Investors
Undoubtedly, this is an alarming time; and there is much left to play out on this front, so I am sure investors are looking for guidance. The first piece of advice I would offer is that it is important to plan, not panic during times of uncertainty. The tragic images and videos of war streaming on our televisions and through our phones evoke a significant emotional response. This high emotional response can sometimes lead to rash decisions. Instead, focus on the goals of your investment portfolio and think about the long-term implications of investment decisions you make today.
The second piece of advice I would offer is that uncertainty in the markets is more significant for those with a shorter time horizon. If you are a young investor with decades left before you start drawing on your portfolio, you have plenty of time to weather the uncertainty of the current state of the world. However, if you are an investor nearing retirement and need to begin drawing on your portfolio for income, uncertainty becomes a measure of risk that should be factored into your portfolio; measured adjustments into more conservative assets should be contemplated.
Finally, I must emphasize the importance of broad diversification. It is impossible to tell how this conflict will resolve, when it will resolve, and the global impacts once it is resolved. Because of these uncertainties, it is impossible to forecast who the winners and losers will be - having your assets broadly diversified assists in spreading that risk and may help your portfolio weather these uncertain times.
For any questions about your specific circumstances or investment portfolio, please reach out to the Financial Wellness Call Center at (888) PEN-401K (736-4015) or schedule a call with us.
1World leaders slap sanctions on the Kremlin over invasion, Associated Press, February 24, 2022.
2 Market Data, Wall Street Journal, as of market close February 24, 2022. https://www.wsj.com/market-data?mod=Home_MDW_MDC
3 What countries are the top producers and consumers of oil?, U.S. Energy Information Administration, December 8, 2021. https://www.eia.gov/tools/faqs/faq.php?id=709&t=6.
4Joined by Allies and Partners, the United States Imposes Devastating Costs on Russia, White House Statements and Releases, February 24, 2022. https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/24/fact-sheet-joined-by-allies-and-partners-the-united-states-imposes-devastating-costs-on-russia/.
This material is provided for general information and educational purposes only. Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).