Uncertainty creates worry and fear which leads to market falls and volatility. Historically safer assets like gold and US Treasuries have done best immediately after times of geopolitical crisis, while risk assets like stocks have suffered. However, risk assets were already suffering before the start of this conflict. We have seen a quick rebound since the conflict started. The S&P 500 was a negative 11.32% year to date on February 24 when Russia invaded Ukraine. Since then, it has rebounded 3.09% to a negative 8.23% year to date. We are in the very start of this, hopefully very short, conflict so expect sign As the stock market continues to understand the situation there is expectation that the market will continue to improve. As examples; Gulf war saw a rebound 5 months after its start, and the Iraq war saw rebound 3 months after start.
Generally, markets have been on average 2% higher 3 months after the geopolitical event and on average 5% higher 6 months after the geopolitical event.
Russia’s representation of the global economy is quite limited. We expect that the invasion, if it stays as a conflict only within Ukraine, will have a limited impact on world markets. The largest impact is going to be felt in commodities, specifically oil and gas, which will impact inflation. Because of the invasion, inflation is likely going to be higher for longer. The European Central Bank activity is going to have to delicately balance higher inflation and slowing growth.
The United States is more insulated from the impacts of higher energy prices in Europe, so it is likely that Federal Reserve will continue with rate hikes, albeit at a more measured pace that previously estimated. We maintain that the best way to overcome the fear of the unknown is to read from multiple sources as much as you can. We do not recommend portfolio changes during upheavals like this because a properly diversified portfolio already has a built in safety net of cash and bonds. Stocks are always for the long haul and will regain any losses in the long term.
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