Ukraine and the Volatility in the Stock Market

| March 5, 2022 | 0 Comments

As I write this article, Russia has finally made its move into Ukraine. After building up troops along the Ukrainian border, Vladimir Putin ordered a full-scale assault on Ukraine with the stated objective of replacing its government. I don’t want to minimize the impact this would have on Ukraine, which will be devastating, but the Biden Administration and our European allies have made it clear we will not be drawn into war in Ukraine, so a broader conflict is highly unlikely.

Focusing on the investment implications, investors don’t know which way things will go at the early stage of a crisis, so the first reaction to news like this is typically to sell risky assets (stocks) and figure out the more nuanced ramifications later. Today, this is exacerbated by a perception that the stock market may be overpriced already and follows reports of higher-than-expected inflation and rising interest rates. Investors like low interest rates and dislike high inflation and armed conflict, so the stock market’s sell-off in the face of this trifecta is understandable. Expect more volatility in the days to come.

However, it’s important to note that we’re coming off a period of relatively low volatility. Given how surreal the past two years have been, it’s easy to forget that the last time the stock market was down more than 10 percent was in early 2020 at the beginning of the COVID pandemic. During 2021, according to JP Morgan, the largest stock market drawdown was only about minus five percent compared to the average of minus 14 percent since 1980, so this has been a period of relatively low volatility despite the sizeable market gains.

Volatility in the stock market is normal and often represents an opportunity to add to our stock positions. Looking at the bigger picture, a conflict in Ukraine will result in sanctions on Russia’s economy, most notably the finance and energy sectors, and will likely impact energy and grain exports. While this could result in higher prices for oil, gas and some food commodities like wheat and corn, the rest of the economic impact should be relatively minor. US company exposure to Russia and Ukraine is not significant, so corporate earnings aren’t likely to be impacted, and US producers of oil, gas and grain may actually benefit from the higher prices.

Stepping back even further, the current economic conditions are broadly favorable, even if energy prices remain high. The recovery from the pandemic continues and unemployment is very low. The current COVID wave is receding, and corporate profits are generally setting records despite rising wages and inflation. The impact of any conflict on inflation is more important to investors and could subdue already modest growth expectations for the coming months. The long-term impact of a drawn-out conflict or tougher sanctions regime are more difficult to gauge, but a contained conflict in a remote corner of Europe shouldn’t have a large impact on the global economy.

The bottom line is that stock market volatility is to be expected; think of it as the price we pay for the higher long-term returns that stocks provide. That doesn’t make it enjoyable, but it is part of investing for the long-term.

So, what can you do to protect yourself in a market like this? The most important thing you can do should have been done a while ago: determine how much downside risk you can handle and build your portfolio so that you have a low chance of experiencing it. Adding diversifying investments like bonds, cash and real estate can help soften the blow when stocks tumble. It means you won’t get the full stock market performance when things are going smoothly, but those diversifiers can also help reduce your losses in difficult times like today.

The other thing you can do is almost as important. It’s critical that you don’t panic when bad headlines buffer the market and stock prices turn south. The stock market can reverse quickly, long before it will feel “safe.” Those who panic often miss out on months of gains by sitting on the sidelines during the recovery waiting for the all-clear signal.

If you’re feeling nervous about your portfolio and the current market conditions, chat with a Certified Financial Planner™ professional to make sure it’s right for you.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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