ASSET MANAGEMENT SPECIAL REPORT: Perspectives on the Russia/Ukraine Conflict

Today, the attention of the world is focused on the current Russia/Ukraine conflict. This geopolitical clash is concerning from several perspectives, but we are especially troubled by the potential human tragedy. In light of the interconnectedness of our global communities, it is important that we take time to examine the possible impact of this event across the economic landscape. With the S&P 500 in correction territory (down just over 10% from its recent high) and understanding that news headlines and the associated financial market reactions can be alarming, we have outlined some points for perspective on the situation and some practical, rational steps to take during this volatile period.

Possible Reasons for the Conflict

Russia has invaded the Ukraine with the presumed objective of enhancing regional security and domestic political legitimacy given recent political uprisings in former Soviet bloc countries like Ukraine, Belarus, and Kazakhstan. Ukraine also holds large deposits of many key natural resources and is an important transit location for oil and gas.

Key Issues and Perspective

Our primary economic concern is additional inflationary pressures on top of already high levels of inflation. Russia is the third largest global producer of oil and provides Europe with nearly 50% of its needed natural gas supplies1. Ukraine is also a major supplier of natural gas and an important transit location for oil and gas flowing into Europe. Additionally, Ukraine holds around 10% of the world’s iron ore reserves and holds the largest deposits of uranium, manganese, and titanium in Europe1. Disruptions to the supplies of these key commodities because of the conflict along with potential sanctions on Russia are likely to continue pushing energy prices higher in the short term. West Texas Intermediate crude has jumped about $7 today to nearly $100 a barrel as of this writing1. With the Consumer Price Index already running at 7.5% year-over-year in the U.S.1, higher energy prices will likely exacerbate the impacts of inflation on households globally and potentially slow the overall economy marginally.

Reasons to Ignore the Noise and Keep Perspective: We think tuning out the noise and not initiating any drastic investment actions is the best approach for the following reasons:

  • Geopolitical selloffs are typically short-lived. As illustrated in the chart below2, stock market pressures in the face of some major historical geopolitical events have been both short-lived and modest in terms of drawdown, with positive forward returns.

  • The U.S. Economy Remains Robust. Leading economic data such as new orders for consumer goods, jobless claims, retail sales, building permits, and the ISM Manufacturing and Services surveys point to expanding and robust economic growth1. The Russia/Ukraine conflict could slow this activity modestly, but we do not think it will be enough to significantly impact U.S. economic growth or corporate earnings.
  • The Russian economy is 1/20th the size of the U.S. and 1/15th the size of China, and Ukraine’s is even smaller1. Therefore, we do not expect that the conflict will derail the global economy.

Reasonable Actions to Take Now:

  • Focus on your longer-term financial goals. Recognize the Russia/Ukraine conflict is unlikely to significantly impact your longer-term goals if you remain focused on executing your plan.
  • Stay diversified. It has been tempting to sell bonds recently given interest rate volatility, but events like this highlight the reason to stay patient and diversified as bonds typically hold up well relative to stocks and other risk assets during periods of uncertainty. Also, diversification within equities is important. Large technology stocks have been in favor for several years, which may have led some investors to hold lesser amounts of diversifying asset classes like energy, utilities, and consumer staples than warranted. Maintaining a well-diversified portfolio helps weather short-term, unexpected storms like geopolitical events.
  • Maintain strategy and discipline. In many investment strategies we manage, we are actively looking to harvest losses in positions that are down and upgrade to higher-quality positions we prefer. This pruning process supports tax-efficiency and improves portfolio quality without changing the overall risk/return profile of those portfolios. Also, basic rebalancing is something we consider regularly, especially during periods of volatility. With stocks down, it is likely a good time to trim positions that have done well and add to positions that have been hurt most during this period of volatility. This process maintains discipline and reduces emotional decision-making during a period when emotion can run high.

Equity market corrections are normal and needed so that prices stay fair. Volatility is likely to continue in the shorter run as traders continue to assess the Russia/Ukraine conflict along with a less friendly Federal Reserve given high levels of inflation. Historically, mid-term election years have been more volatile1. For now, we think the impacts from the Russia/Ukraine conflict may lead to even higher short-term inflation, but are likely to have only modest impact on the U.S. and global economy. The US economy is likely to remain robust in 2022, which should support corporate earnings and stock market valuations. Patience, balance, and discipline continue to be key words in 2022.

As always, we appreciate your confidence in our team during uncertain times.

 

Asset Management Department

Sequoia Financial Group

 

Sources: 1. Bloomberg/Bloomberg News, 2. Vanguard Geopolitics and market behavior (2/23/22)
The views expressed represent the opinion of Sequoia Financial Group. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Sequoia believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sequoia’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Past performance is not an indication of future results. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

The views expressed represent the opinion of Sequoia Financial Group. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Sequoia believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sequoia’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Past performance is not an indication of future results. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

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Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

Perspectives on the Russia/Ukraine Conflict: 02/24/22 | Sequoia Financial Group

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