Investment Update Regarding the Developing Situation in Ukraine

This article brought to you in collaboration with our colleagues at Laird Norton Wealth Management. You can also find it on their website linked here.

While this note will focus on your portfolios, let us start by saying our hearts and thoughts go out to the people of Ukraine today. We hope this is a very short-lived conflict and peace returns to the European continent as quickly as possible.

Ways to Help

Given the escalation in the Russia-Ukraine situation and the potential geopolitical, economic and market implications, we wanted to provide you with a communication framing the situation. Russia has moved aggressively as it seeks to reduce NATO’s presence in eastern Europe and increase its own dominance in the region. Russia’s bombardment of military installations throughout Ukraine coupled with cyberattacks have increased the prospects that Putin’s ultimate aim is to shift the balance of power in Europe to what prevailed during the Cold War. Western powers are formulating additional economic and financial sanctions against Russia in response. While extensive, these sanctions are not likely to impact the global economy in a material way.

If the conflict continues to escalate, the greater risk is ongoing disruption to energy, food, and the overall global supply chain, which is already fractured due to the pandemic. If it plays out, this risk has the potential to exacerbate inflationary pressures and challenge global growth. From a more positive perspective, threats to global growth historically create a flight to safety into bonds, thereby supporting prices and lowering yields. It remains to be seen if these risks to the global economy would cause the world’s central banks to defer their planned tightening.

As wealth planners and long-term investors over many decades, we have shepherded clients through a variety of shocks to the capital markets — wars, a credit crisis, a pandemic, to name a few. We draw on all that experience as well as market history to provide context during downside volatility. While each conflict is different, and this one has the potential to change the complexion of Europe, geopolitical market shocks since the 1960s have tended to be short-lived (see chart from Vanguard below).

Geopolitical Sell-Offs are Typically Short Lived

Source: Vanguard calculations as of December 31, 2021. Returns are based on the Dow Jones Industrial Average through 1963 and the S&P 500 Index thereafter. All returns are price returns. Not shown in the above charts, but included in the averages, are returns after the following events: the Suez Crisis (1956), construction of the Berlin Wall (1961), assassination of President Kenney (1963), authorization of military operations in Vietnam (1964), Israeli-Arab Six-Day War (1967), Israeli-Arab embargo (1973), Shah of Iran’s exile (1979), U.S. invasion of Grenada (1983), U.S. bombing of Libya (1984), First Gulf War (1991), President Clinton impeachment hearings (1998), Kosovo bombings (1999), multi-force invasion of Libya (2011), and U.S. anti-ISIS intervention in Syria (2014).

Market Performance in Context

Recent market weakness, while rapid, should be put into perspective. It is fair to say the wind was at our backs for the past three years, with cumulative returns of 100% for US large-cap equities and 75% for global equities (through 2021).1

As of today, the S&P 500 is down roughly 11% from its 52-week high, putting it back to where it was in June 2021. Consider that since World War II, the S&P 500 has experienced 28 corrections (drops of 10% or more from recent high), usually one every two years with an average decline of 13%. The average performance one year later: 9.3%.2

Interestingly, foreign equities outside of Europe have performed relatively well, reaffirming the value of diversification. Emerging market equities are down 6.5% so far in 2022, while global stocks are down around 10%.

What Now

No one can predict how this conflict will evolve. In the meantime, we believe the greatest risk to achieving your goals is not downside market volatility; it’s making a suboptimal, emotionally driven investment decision. Please keep in mind a few things:

  • Adherence to your wealth plan and the strategic allocations in your Investment Policy Statement is key. These are the components of your personal “business plan” and were built for these moments; they provide you and us with a long-term, unemotional investment blueprint for achieving your goals. If you have excess cash and/or are underweight equities and can tolerate drawdown risk, you may consider incrementally dollar-cost averaging into this sell-off.
  • Diversification is a risk mitigator. We have allocated portfolios with exposures designed to provide stability in risk-off times like these. This includes core fixed income, an allocation that serves its purpose as equity markets decline. We construct portfolios very thoughtfully, with each exposure expected to play a distinct role in diversifying the types and level of risk being taken and the opportunities they are targeting.
  • Good portfolio performance over the long run is based on occasionally experiencing losses in the short run. We don’t know how deep or how long the current sell-off will last – we cannot possibly know. We know that sticking with a disciplined approach to investing and not allowing downside market volatility drive bad decisions works.
  • There are likely to be more opportunities developing, especially as we acknowledge an elevated level of uncertainty. As we sort through the confusion brought on by recent events, we feel confident in our approach to risk management, the universe of opportunities resident in portfolios and new ones we are exploring.

Russia’s attack on Ukraine is an evolving situation—one the entire world is trying to assess in terms of the short-term and long-term implications for the global balance of power and the global economy. Our investment team is engaging with our asset managers from around the world, tapping into their expertise and access to information to glean insights on a real-time basis. As events unfold, we will continue to update you.

If you have any questions specific to your situation or would like additional perspective, as always feel free to reach out to your Wetherby team.

1,2Dow Jones Market Data


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