Ukraine Effect on Investment Portfolios
Russia’s invasion of Ukraine caused markets to drop into correction territory while oil and gas as well as gold prices surged. Although geopolitical events like the war in the Ukraine tend to have short-term implications for the stock market, this type of invasion has not happened in over seventy years. The lasting consequences are still largely unknown. But as of right now, we believe the war’s effect on the stock market is temporary. The Fed and inflation will have a greater impact on the U.S. economy in the long run. However, the war will likely increase inflation pressure due to supply chain disruptions and increased gas prices. Also, 29% of worldwide wheat supply comes from Russia and the Ukraine according to The Wall Street Journal.
On the positive side, the U.S. economy is still strong. Job and wage numbers are improving. Corporate earnings are robust. According to Homrich Berg, a wealth management firm headquartered in Atlanta, “U.S. companies have low direct revenue exposure to both Russia (~0.6% for Russell 1000) and Ukraine (<0.1%).” According to FactSet, “The combined revenue exposure of the S&P 500 to Russia and Ukraine is about 1%.” Prior to Russia’s invasion, Goldman Sachs predicted that the worst case scenario of an invasion would cause the S&P 500 to drop 5% and the Russell 2000 to drop over 10% while the European markets would sustain a much larger hit of close to 70%. Although our exposure to Europe has already been minimal to begin with, we further reduced it by a third a month ago. The current consensus is that the long-term effect of the war will be felt more strongly internationally than in the U.S. But even if the predictions are wrong and the impact will be more sustained, we feel our diversified portfolios are well equipped to deal with any possible fallout.
What's happening in Europe is scary. The full impact and developments of the war are unknown. It is important to stay calm. We agree with Jason Zweig, a columnist for The Wall Street Journal, who said, "It isn't investments that get tested in turbulent markets; it's investors." Trying to time the market is a loser's bet. The better approach is to position a portfolio to ride out potential volatility.
We will continue to monitor the situation and make tactical moves as we see fit. For the moment, we believe selling out of risk assets is premature and poor timing. We may come across buying opportunities. Don’t hesitate to reach out with any questions or concerns.