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Note: The following are Personal Capital’s views on events occurring in Ukraine, focused on the potential impacts on global markets.
After weeks of buildup, Russia invaded Ukraine last week, in actions spanning beyond what most expected.
The invasion of Ukraine continues, leading to hundreds of Ukrainian and Russian casualties. Our thoughts are with the millions of people who are and will be directly impacted.
The past week’s events have changed the world order, restoring something akin to the Cold War. It’s hard to see meaningful cooperative spirit between Russia and the West anytime soon. Russia and China will likely grow closer, though how and to what degree are impossible to predict. All of this is both sad and a little scary.
What Does This Mean for the Market?
As for global capital markets, one should consider more important drivers of equity or bond prices to be earnings results, inflation trends, central bank policies, and COVID. Russia represents about 2% of global GDP. The other 98% is still growing. The Fed remains primarily focused on inflation and will begin raising interest rates in March. It is possible central banks will act with more restraint due to uncertainty stemming from Ukraine, a view that pushed U.S. growth stocks higher on the day of the invasion.
Stocks often fall around moments of crisis, only to post better than average returns over the next 6-12 months. Global prosperity is maximized by peace and open markets, but stocks fared quite well in general during the 1950s, ’60s and ’80s, periods of peak tension between the U.S. and Russia.
What Does This Mean for You?
The invasion does introduce some risks. Following are a few immediate examples.
Energy (and other commodity) prices may spike.
Russia accounts for roughly 10% of the global oil supply and its natural gas is greatly needed in Europe. On their own, higher energy prices create a modest drag on global economic growth, but it would take a significant increase in an extended conflict to have meaningful economic impact.
If gas is withheld from Europe (unlikely but possible), it could send the region into recession. Higher energy costs boost overall inflation, potentially forcing central banks to increase interest rates faster and creating a headwind for stocks and bonds.
Despite these short-term fears, the world has proven it can produce more oil than it needs, if it wants to. U.S. shale typically costs around $50-$60 to produce. For a while, it became almost taboo for U.S. oil companies to dig new wells or for banks or investors to finance them. This will change quickly in a world where $50+ profits per barrel are to be had, and we are already starting to see it. If oil production becomes viewed as a national security issue, America’s ability to mobilize will be fast and furious. It may take a year or more, but we expect oil prices will drift back down, perhaps violently at some point.
Armed conflict could widen.
Only Putin has a clue what his endgame is. Sanctions and reduced cooperation with Russia will have a significant negative impact on the Russian economy. The ruble is at a record-low, having fallen roughly 26% to 105.27 per dollar, down from about 84 per dollar late Friday. Discontent at home could make Putin more volatile and willing to take bigger gambles. The risk of attack on a NATO country is remote but cannot be ignored. Unfortunately, this risk is now likely to remain elevated far beyond 2022.
Markets are likely to experience heightened volatility.
Investors should expect higher volatility to persist, but fear, similar to greed, remains counterproductive, and timing the gyrations almost impossible. Investors need only look at the market returns from this Thursday, which swung wildly from negative at the open, to strongly positive by the close, to see a recent example of the increased volatility.
Those invested in a thoughtful, diversified strategy are well positioned to stay the course and succeed in an unstable world.
Global stocks are teetering on correction territory, down about 9% for the year.
What Should Investors Do?
In choppy times, diversification can help shield your portfolio from dramatic swings. Asset allocation remains most important. International stocks fared worse with news of the invasion but remain at a discount on an earnings basis and are holding up better so far this year. Bonds rose on the day of the attacks, as did commodities and U.S. growth stocks.
Personal Capital has several free tools within our Dashboard that could help bring clarity during this uncertain time:
Investment Checkup: Ensure your portfolio is properly diversified, and compare your current asset allocation to our recommended allocations.
Retirement Planner: Get a realistic sense of how increased inflation and volatility may impact your portfolio’s longevity.
It’s normal to feel unnerved. If you’d like additional support beyond our free tools, Personal Capital’s registered financial advisors are prepared to help you navigate challenging times.
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