Russia’s invasion of Ukraine continues to dominate headlines. The situation is ever-changing and there remains uncertainty as to the duration and resolution. Russia’s advance has brought with it a wake of destruction and a devastating humanitarian crisis, which remains at the forefront of our minds.
That being said, events such as these have a tendency to generate market volatility that can rattle an investor’s emotions and mentality. These market gyrations, while unpleasant, are usually fleeting in nature and making rash investment decisions, as a result, can be detrimental. We remained focused on the impact on underlying fundamentals, rather than the intermediate political dynamics.
History has demonstrated that while markets may exhibit apprehension and volatility in the short-term during periods of heightened geopolitical tensions and other global events, over the long run they remain quite resilient, as pictured in the chart above. Stock markets have also shown to be more sensitive to economic events than geopolitical ones.
Currently, the most apparent economic result of Russia’s invasion of Ukraine is elevated commodity prices (and inflation), which was already a byproduct of supply chain imbalances, strong demand, and an inflated money supply as the economy recovered from the COVID-19 pandemic and economic shutdown. Ukraine provides a meaningful supply of the world’s barley, corn, sunflower oil, rapeseed, and wheat and Russia is a large supplier of energy, specifically to Europe. Further supply disruptions are a likely result as many countries limit and cut off imports from Russia, and Ukrainian citizens focus on defending their country and seeking refuge.
As of now, the conflict remains isolated within Ukraine’s border. A more widespread war would certainly have economic ramifications on a more global scale. However, we view an escalation to include other nations as unlikely. Russia understands their military capabilities are not remotely sufficient to oppose those of NATO, and they continue to deal with their own internal conflict and economic fallout from global sanctions.
At this time, the impact on corporate profits (the main underlying pillar of equity markets) is negligible. The expectation remains that corporate profits for companies in the S&P 500 will grow 8.5% in aggregate versus 2021, according to FactSet. Any deterioration in this outlook would certainly be concerning. Our base case scenario is still economic expansion in both the US and Europe.
To add some perspective, the COVID-19 outbreak and economic shutdown crippled the global economy, sending earnings for the S&P 500 lower by 22% in 2020. While this did result in a 30%+ sell-off in equities, markets soon hit new highs with the S&P 500 returning 18% & 28% in 2020 & 2021, respectively.
While Russia’s invasion of Ukraine has injected a dose of volatility, we view other topics, such as corporate margins, earnings growth, Fed policy, and valuations as more relevant to the market’s trajectory. As such, we remain focused on the impact of current events on these economic fundamentals more than the transitional political implications. We are not market prognosticators; however, we do not expect another year of double-digit returns. These themes make returns this year a challenge, but certainly not impossible.
As always, partnering with a trusted advisor to help you develop a robust investment strategy and diversified portfolio is a wonderful way to navigate market volatility. If you have any questions on market volatility, BerganKDV can help. Join us for an upcoming webinar where we will take a deeper look at the current state of the market, compare it to previous historical market events and share how to account for volatility in your investment strategy. Learn more about the webinar and register here.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve and past performance is no guarantee of future results. Any forecasts contained in here are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.