Perspective

Market Implications of Russia’s Invasion of Ukraine

Last week, on February 24th, the world watched as Russia invaded its neighboring country, Ukraine.  Vladimir Putin has launched Europe’s most intense war in a generation – and possibly its largest since World War II.

The humanitarian cost of Putin’s actions is immeasurable and includes the deaths of over 2,000 civilians and children so far.

Meanwhile, the markets are on another roller coaster ride as investors digest the economic and financial ramifications. As of March 2nd, the U.S. equity markets, as measured by the S&P 500 Index, have lost almost 8 percent since the start of the year, and the broad international markets, as measured by the MSCI ACWI ex U.S. Index, have lost 7 percent for the same period.

The uncertainty and sharp market movements may leave you wondering what all of this means for your investment portfolio and financial plan. Should you be making any shifts in strategy? We wanted to share with you our perspective on the situation and what it means to your financial future.

Economic Response To The Invasion

In response to the invasion, countries around the world have imposed various economic restrictions on Russia, including blocking technology and limiting financial transactions. The purpose is to cut Russia off from the resources and funds needed to power its economy and military.

The effect of the sanctions was immediate and has resulted in a severe downturn in the Russian economy and capital markets. The Russian Ruble has fallen as much as 30 percent since the invasion began and there have been runs on Russian banks as citizens try to hoard cash. The Russian stock market has been closed as Russian stocks and bonds are essentially untradeable. In an attempt to defend their economy, the Russian Central Bank instituted an emergency rate hike from the previous 9.5 percent level to 20 percent.

How Does This Change Economic Prospects Looking Forward?

Commodities, Food, and Metals

Commodity prices, most notably oil, have risen sharply in anticipation of supply disruptions of Russian-sourced oil. As of March 2nd, the price of a barrel of oil (WTI) was $111. This is an increase of 45 percent since the beginning of the year when the price was $76 per barrel. We will most likely be feeling the impact of this price increase when we visit the gas pumps.

Our grocery bill will probably see upward pressure as well. Both Russia and Ukraine together account for nearly 30 percent of global wheat exports. We may see production and shipping interruptions of some food items, which will likely drive prices higher.

Russia and Ukraine are major producers of metals like palladium, titanium, iron ore, and steel. Closures of rails and ports in the region, as well as the sanctions, have crippled exports of these metals to other countries. This could have negative ramifications for supply chains in the aerospace, medical, automotive, and other industries.

Economic Growth

Both Russia and Ukraine are a small piece of the global economic picture, accounting for less than 2 percent of global Gross Domestic Product (GDP) collectively.

Pre-invasion, global GDP was projected to grow 4.9 percent this year per the International Monetary Fund (IMF). The negative impact to growth as a result of the invasion is unknown at this time and will depend on the length and severity of the conflict.

Another factor will be how the global unrest weighs on consumer sentiment. Given the uncertainty, consumers may pull back on spending for non-essential goods and services. This could negatively impact economic growth.

Interest Rates

Central banks around the globe are poised to raise interest rates in an effort to spur economic growth and curb inflation. However, given the change in the geopolitical environment, global central banks will most likely take a more cautious approach to changes in monetary policy.

In the U.S., Federal Reserve Chairman Jerome Powell indicated that he still feels it is appropriate to raise interest rates in the near future, but the central bank will remain flexible in its approach. Before the Ukraine invasion, expectations pointed to a 0.50 percent interest rate hike in March, but Powell has since hinted at a lower increase of 0.25 percent given the geopolitical crisis.

What Does This Mean For You?

Domani Wealth-managed portfolios have negligible direct exposure to Russia. However, the broader, ongoing impacts to capital markets warrant continued monitoring.

Ultimately, market disruptions from geopolitical tensions have tended to be brief throughout history.  While we would not be surprised to experience continued volatility, we do not believe the situation currently warrants any changes in strategy or approach.

Let’s look back at history to see how the markets have typically reacted to geopolitical crises. The chart below outlines geopolitical shocks over the last 80 years and the immediate equity market reaction.  Returns for 6- and 12-month time periods after the crisis are also shown. You can see that while the initial market movements are sharply negative (red box) investors who stayed the course typically saw the benefits of the subsequent market rally (green box).

Russia's invasion

We Are Here For You

We know these times of uncertainty can be unsettling for many reasons. We do not have a crystal ball, and no one knows how the Russia/Ukraine conflict will end or what the lasting effects may be.

But rest assured your team at Domani Wealth is closely monitoring the situation. We are here to answer your questions and guide you through this volatile period. We are here to give you our perspective and help you stay focused on your financial goals.

It is our pleasure to speak with you about your portfolio or financial plan. We support you on your financial journey and are here to help give you peace of mind. Don’t hesitate to reach out to us for a conversation or meeting.

We appreciate your trust in us and we are always here to help.

 

Sources and Footnotes:

Source for index data:  Bloomberg.

Sources:  The Wall Street Journal, Morningstar, Bloomberg, Callan, Financial Times, International Monetary Fund, Reuters

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Domani Wealth, LLC [“Domani]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Domani. Domani is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of Domani’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.domaniwealth.comPlease Remember: If you are a Domani client, please contact Domani, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

 

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your Domani account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Domani accounts; and, (3) a description of each comparative benchmark/index is available upon request.

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