Some perspective on the grim situation in Ukraine and what could happen in markets. (Need a break from it? Scroll down to the P.S.) The invasion of Ukraine is a serious and scary escalation in tensions between Russia, Europe, and the United States. Before we dive in to what it could mean, let's take a moment to think about the many folks who are suffering and dying as well as the ordinary Russians who will suffer from sanctions, instability, and economic damage. I hope and pray that diplomacy can end this crisis for all our sakes.
Let's talk about some possible implications for markets and our economy.
Given Ukraine's critical pipelines and Western sanctions on Russia, the crisis may lead to higher energy prices, which will trickle down to higher pump and heating fuel costs.1 Sustained price increases could hamper the Federal Reserve's effort to control inflation, so we're keeping an eye on that as well. What could happen in markets? Extreme volatility, as we've already experienced, is very likely. Another correction (or even a bear market) is definitely possible. The Russian stock market remains closed, but some foreign listed Russian stocks are down 70, 80, even 90%!2
Thankfully we sold all of the Russian stock exposure in our discretionary strategies in December and January; it is times like this when we are so thankful to have a sell discipline! And of course we are on the lookout for sectors that might benefit – energy stocks and gold have been added where appropriate.
What does history teach us about market reactions to geopolitical shocks?
History shows that stocks usually recover quickly from geopolitical crises. I'll add a disclaimer that the future doesn't perfectly match the past — but it often rhymes. Let's take a look at some examples from other invasions and wars.3
Here's the key takeaway: short-term, markets usually react badly. However, a year later, markets have historically recovered. Will they always? In every case? That's impossible to say. But, the study of 29 geopolitical events since WWII shows a general trend toward short-term losses in the first weeks and longer-term gains over months.3 A note: "geopolitical event" is a very antiseptic phrase for horrible things like bombings, wars, invasions, attacks, and really fails to encompass the full cost in human misery. Let's never forget the truth behind the numbers.
We can't know or control what happens next. We can hope, pray, donate, and speak out.
And we can focus on what's in our control: Ourselves, our actions and reactions, and our strategies for uncertain times. Let's hug the people we love extra tightly today and be very grateful for our blessings.
P.S. Tired of war and bad news? Need a break? I've got two TED talks for you: 1) A dive into research that shows how our brains might be wired for optimism; 2) How to forge meaning from challenging moments.
P.P.S. Looking for ways to donate to Ukrainians? Here's a roundup of some organizations doing good work. A list of faith-based organizations can be found here.