February 24, 2022

Ukraine Conflict

By Michael McKeown, CFA, CPA, Chief Investment Officer

Ukraine Conflict

The crisis in Ukraine continues to unfold as Russia advances its attack on the region.

The loss of human life is the first concern. It feels callous to talk about markets in perilous times such as this. Yet it is our responsibility on behalf of our clients to navigate financial markets.

I will not pretend to be a geopolitical expert. But I do read a lot.

Consensus among the experts seems to be that this will be show of force by Russia. A diplomatic response with sanctions by the US and our Allies is expected. The duration of the conflict is difficult to handicap as the range of possibilities is wide. It could be short or much longer. The risk has shifted from a possibility of conflict to the extent of conflict. It may be an orchestrated skirmish or far worse.

Equities are selling off globally. Every strategist cites geopolitical events and pandemics as risk factors that can impact equity prices in the year ahead. It is unfortunate we have witnessed both of these in such a short time frame. Over time, equity investors are compensated for these risks with a return premium over fixed income. The ride to achieve these gains is often volatile. But the volatility is the reason equity investors enjoy higher returns over the long-term.

During past historical events, the equity market recovered outside of recessions, increasing nearly 11% over the next year. In events taking place near a recession, markets fell over 11%.

How Stocks Performed After Major Events

We are seeing the diversification provided by bonds and gold, helping ballast portfolios in the near term.

“We know we don’t know” is a phrase we have often said at our firm to approach problems with a humble mindset. We do know that forecasting events and market moves is nearly impossible in real time.

Fortunately, forecasting is not necessary for long-term investment success. Having a time-tested investment process is what gets investors through volatile periods.

Our investment principles do not change. Valuations matter and the price you pay is important. Momentum rules in the short term. Diversification works.

At the beginning of each quarter, our investment committee meets to discuss how we will respond to different market events. This accounts for both up and down markets. It has helped guide us through tumultuous periods in the past.

We have guidelines and benchmarks for taking action across equities and fixed income. We will respond as those thresholds are hit and trigger our plans laid out in advance.

We will monitor how the Ukraine conflict affects the economic outlook, consumers, interest rates, equities, and oil prices as more information unfolds. Fortunately, the U.S. economy is not reliant on this region for trade and energy prices should be less affected here than in Europe.

It is easy to become caught up in the price moves over the short-term as our financial resources come under price pressures.  “Focus on the long-term” is a common phrase for investors, but it said for a reason – because it works.

Important Disclosure Information

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