Russia’s invasion of Ukraine has sent panic throughout the world and asset prices, rightfully so. Europe hasn’t seen conflict like this since WWII. Plus, Russia’s invasion is eerily similar to Germany’s 1938 invasion of Czechoslovakia as Vladimir Putin attempts to rebuild the Old Russia dismantled decades ago. There are fears that this invasion will spark an all-out war in Europe.
I do not see this happening. Ukraine is not a Nato member. If Russia were to invade a Nato country, a U.S.-led force would likely engage in an actual effort to push back Russia. I do not see Putin taking this risk.
As such, there is little doubt that Russia will succeed in taking Ukraine. Most analysts say that Putin could take over the country within 72 hours to a week, bringing on needless human suffering and death by an autocratic dictator. Worst yet, it could encourage Putin to do more in the future.
Instead of forcing peace through strength, the U.S. and its allies display weakness, which I fear might invite more Russian aggression in the years to come.
China, of course, is watching to see how the west responds to this conflict. I don’t believe it will try to take Taiwan during this invasion as they tend to move more carefully.
Before China took Hong Kong in 2020, there were years of actions to bring the island into political lockstep with the Chinese Communist Party: arresting activists, seizing assets, detaining newspaper editors, disappearing people, etc. I suspect that it will attempt to subvert and turn Taiwan through other means rather than execute an all-out invasion.
As asset prices have sold off on the news of Russia’s invasion, the question is, how impactful will this be to U.S. markets?
In January and early February 2014, Russia invaded the Ukrainian territory of Crimea. During this short period, the S&P 500 fell by 8%. However, within 20 days, the market fully recovered.
According to Truist co-chief investment officer Keith Lerner, “in nine of the last 12 geopolitical shock events, the S&P 500 Index was higher 12 months later, with an average 12-month return of 8.6%.”
From the start of WWII in 1939 to the end in 1945, the worst conflict in global history, the Dow Jones was up 50%, representing an average annualized rate of return of over 7%.
Of course, market performance is influenced by more than just war, especially this year. We are faced with many changes this year – reopening economies from COVID restrictions, high inflation rates, the Fed’s actions, an election year, and a possible resurgence of the Build Back Better bill.
However, if we only considered the Russian invasion, then history would suggest that panic selling is not a good idea (it rarely is). Instead, this might be an excellent buying opportunity.
The most apparent industry impacted by this war is energy. Oil prices and natural gas have already been rallying on Russian aggression. As President Biden unveiled new sanctions, the U.S. is working with other countries to release additional oil from crude reserves to alleviate impacted supply. Though, it will be difficult to completely counter-act these supply hits.
Russia is the second-largest oil exporter. According to UBS analyst Giovanni Staunovo, “the oil market cannot afford large supply disruptions” given the low inventories and dwindling spare capacity.
This, combined with persistent inflation, oil trading higher than $100 per barrel might be a new normal for a while.
While this invasion is alarming and disheartening for those who value freedom and human rights, it is vital to disassociate one’s emotions from your investment portfolio. Remember that fear is one of the four deadly sins of investing (ignorance, greed, and hope are the other three). Making investment decisions when one is fearful is almost always a bad idea. It is best to stick to your long-term plan and understand that volatility is simply the price we all pay for longer-term returns.
As always, if there is anything we can do to assist you with your financial objectives, please do not hesitate to contact us. We are happy to help.