Situation in Ukraine adds More Uncertainty to an Already Nervous Market
Obviously the situation on the ground in Ukraine is troubling. Markets have been preparing for, and I think are pricing in the assumption of, a Russian invasion. The actual military conflict by itself would not be all that impactful to markets – but the sanctions and fallout from those sanctions likely will be.
Oil and gas prices have already soared in anticipation of possible supply issues. Russia is a major producer of both oil and gas. Prices of both are expected to rise (more pain at the pump, more stretched family budgets).
Potential impacts on supply chains may go beyond oil and gas. Russia is a major provider of many other commodities – copper, wheat, palladium (important for auto manufacture, microchips, etc.). If sanctions impact Russian supplies of important commodities, existing supply chain problems (and the inflation that has arisen due to those problems) will only get worse.
Meanwhile, we continue to deal with the economic threats that were already on the table before Mr Putin started throwing his weight around. Inflation and rising interest rates being the big ones. The market is trying to figure out what all this means to the value of investment assets, and its not a pretty picture. Yesterday the S&P 500 index closed down over 10% from its peak in early January – an official “correction”. Today it seems stocks will be down sharply once again.
In crisis situations like this, bonds are expected to provide a source of safety. Investors can flee to nice safe US treasury bonds, and the price of such safe investments would usually go up in a crisis. But with interest rates expected to rise, the bond market has not rallied as it usually would. Rising rates are not a good environment for bonds. As a result, we have an unwelcome situation where both stocks and bonds are down at the same time. The good news, if any, for bond investors, as I’ve written before, is that all expected interest rate increases are already priced into the bonds. The Vanguard Total Bond Market index is down 3.7% so far this year.
Historically, the financial impacts of geopolitical maneuvers such as this one tend to play out over a relatively short time horizon. Once the situation stabilizes (even if we don’t like the outcome) markets can stabilize and the economy can adapt. Whether or not that is the case this time around depends a whole lot on Mr. Putin, and on what kind of economic sanctions the West is willing to impose, and for how long. Situations like this will often provide a great opportunity to invest money that was previously positioned in cash, or to increase one's allocation to stocks. Lower prices during a crisis offer opportunities for significant growth once the crisis fades. (it takes nerves of steel and a whole lot of conviction to actually DO this, even though it often proves wise in retrospect!) But never take on more investment risk than you can afford! Here is a good article in Morningstar on how investors should react to geopolitical risk: https://www.morningstar.com/articles/1079519/how-should-investors-manage-risks-like-a-ukraine-war
As always, it is impossible to predict future events well enough to get ahead of the markets. In other words, markets assess new information and price it into stock and bond prices much faster than you or I can hope to do so. This is why it is nearly impossible to “get out” of markets in anticipation of disruptive events, and then “get back in” before markets recover. Best approach, just as with the pandemic a couple years ago, is to maintain your diversified portfolio, hold on through difficult times, and let events play out as they will.
It helps not to look at your 401k statement too often as well!