Ukraine & Russia - Financial Market Impact
The invasion of Ukraine by Russia is a serious escalation in tensions between Russia, Ukraine, the European Union, and the NATO Allies that have been building for a long time. The extent to which these latter two entities will participate is yet to be seen and may have serious implications in the days to come.
It’s a hard time for a lot of people, especially those at the center of the conflict. We are thinking of all the people who are suffering and dying, as well as the ordinary Russian citizens who will suffer from sanctions, instability, and economic actions. These actions have consequences that are very real and are being felt throughout the world.
Impacts on the Market and Economy
Given Ukraine's critical pipelines and Western sanctions on Russia, the crisis may lead to higher energy prices, which will trickle down to higher pump and heating fuel costs.1
Sustained price increases could also hamper the Federal Reserve's effort to control inflation, so we're keeping an eye on that as well.
As far as the markets go - Extreme volatility, as we've already experienced, is very likely. Another correction (or even a bear market) is also definitely possible.
What Does History Teach Us
We call instances like these geopolitical shocks. A "geopolitical event" is a very antiseptic phrase for horrible things like bombings, wars, invasions, attacks, and really fails to encompass the full cost in human misery.
And history, though we know we cannot take it as an absolute, shows that stocks usually recover quickly from geopolitical crises. It’s important to remember that the future doesn’t perfectly match the past, but it often rhymes.
The key takeaway is short-term, markets usually react badly. However, a year later, markets have historically recovered. Will they always? In every case? That's impossible to say. But, the study of 29 geopolitical events since WWII shows a general trend toward short-term losses in the first few weeks and longer-term gains over months.2
Interest Rates & Inflation
The Russian invasion of Ukraine has made the Fed’s interest rate decision a little more complicated. The Fed appears set to raise interest rates by 0.25% at its March meeting. Up until recently, there was talk by Fed officials that the economy needed a 0.5% bump to help manage inflation.
Energy prices have been rising since Russia began to assemble forces at the Ukraine border. As prices rise, consumer discretionary spending trends lower as businesses take on higher costs. (Remember, consumer spending accounts for a big chunk of our overall economy.)
Higher energy prices, higher commodity prices, and the prospect of slower economic growth due to lower spending place the Fed in a bit of a pickle; the inflationary impact of these factors could be considerable.
Fed Chair Jerome Powell testified before Congress that he still sees interest rate hikes ahead but acknowledges that geopolitical events have interjected uncertainty into the Fed’s outlook.
What Do I Do Next?
We can't know or control what happens next. We can hope, pray, reach out to our leaders and hope that wisdom prevails. And we can focus on what is in our control: Our actions and reactions, our financial plan, and our strategies for uncertain times.
If you’re worried about the financial markets, please reach out. I understand that current events can be a bit overwhelming, and you may feel the need to be proactive. But remember, this is what we help people with. We create a financial strategy based on your goals, time horizon, and risk tolerance, and we anticipate there might be unsettling events along the way. Please schedule a complimentary appointment here.
You can also stay informed by following our Facebook page: @MillerFinancialGroupInc.
Looking for ways to donate to Ukrainians? Here's a roundup of some organizations doing good work.
1 - https://www.nytimes.com/2022/02/27/business/oil-prices-russia-ukraine.html
2 - https://www.reuters.com/markets/asia/live-markets-what-history-says-about-geopolitics-market-2022-02-18/