News of the Russian invasion of Ukraine is understandably impacting global markets. We expect continued volatility in the near term, but as you’ll read below, the U.S. economy remains solid.
A historical view of geopolitical events on markets
Historically markets have recovered relatively quickly from geopolitical events like the Russian invasion of Ukraine. Looking at major geopolitical events from World War II on, the median length of the selloff was 15 trading days with a roughly 6-percent selloff and a recovery period of 16 days. Some events, like the attack on Pearl Harbor, were worse while others relatively minor. For example, after the 9/11 terrorist attacks, markets sold off about 12-percent over six days but had recovered within 15 days of the bottom.
Europe most likely to be affected by sanctions
The main economic impacts of the invasion will flow through higher commodity prices and will most likely contribute to slower global growth given greater uncertainty and higher inflation. We do not expect a large impact on the U.S. economy. Russian trade with the U.S. is negligible, and the U.S. is a net exporter of oil and the world’s largest producer. Europe, a key trading partner, is the most exposed given their energy dependence on Russia. Sanctions that impact Russian oil and gas sales and production will push up energy prices, especially in Europe. Additionally, Russia and Ukraine are major wheat producers, accounting for about 25-percent of global exports. Russia also is a significant aluminum producer. Prices have risen across these commodity markets in response.
Increased interest rates still anticipated
Further inflationary pressures come at a time when the Federal Reserve (Fed) is about to initiate interest rate hikes in response to inflation. We expect the Fed to continue with plans to increase rates this year, but to slow the pace of increases somewhat in response to greater uncertainty and risks, particularly with consumer confidence already dented by inflation.
We expect continued episodic volatility driven by geopolitical events and the Federal Reserve raising interest rates. The U.S. economy remains solid, however, with high levels of personal savings and wealth, low consumer debt levels, a strong corporate investment cycle and solid earnings. We will look for opportunities on add risk assets as historically market dips are buying opportunities over the intermediate to long run, particularly those driven by geopolitical events. We remain moderately overweight in equities in our mixed asset portfolios; however we continue to maintain an underweight position to Europe and emerging markets.
As always during times of market volatility, clients should connect with their financial professional to discuss personal investing goals and objectives before making significant changes to their financial strategies.