A Quick Note on the Invasion of Ukraine
The invasion of Ukraine is distressing on so many levels. Millions of Ukrainians are leaving their homes, braving long distance travel through the elements and are facing numerous dangers along the way. Thankfully, human compassion is still alive in the world and we’ve seen a shifting of policies from various European countries to help those in need. Everyday citizens are opening their arms and homes to assist displaced refugees.
Geopolitical risk is something the world has faced countless times before, and with this determined power grab by Putin, there is increased volatility throughout the broad markets and many investors are feeling a bit unsettled.
Adding to already high inflation and the uncertainty around the Federal Reserve’s future interest rate increases, markets are now reeling from the added pressure of aggressive sanctions on the country of Russia.
Let’s break it down and look at some of the trends we’re tracking.
The Fed
Though not new by any means, markets have been reacting to high inflation numbers and the impact on expected Fed rate increases. Recently, N.Y Fed Chairman Williams and Governor Brainard indicated rates are likely to rise later this month (March), with sights on a modest increase of 0.25%.
Like the rest of us, the Fed has undoubtedly been monitoring the situation in Ukraine very closely. They’ve been committed to monitoring the data and telegraphing potential moves to markets ahead of time. The Fed is also retaining optionality to keep markets and the economy on as even a keel as possible.
Inflation
Oil prices pushed above $120 a barrel for the first time since 2008. While this will benefit oil producers, it will complicate the inflation picture and hit already high prices at the pump. Over 254 million barrels of oil being imported from outside the US (over 50% of that coming from Canada), and an estimated 7% of oil imports come from Russia. If the conflict resolves – or another producer is found (Hello, United States?), the spike could be temporary.
Markets Have Shifted to “Risk-Off”
Equity markets have dropped and may see further volatility, with the VIX (the so-called Fear Index) opening Monday at 36.5 March 7th, an increase from Friday’s close of 32. A reading above 20 indicates increased volatility.
Since one of the main drivers of the U.S. economy is consumer spending, and though high inflation rates have not seemingly put a damper on that yet, it remains that consumer behavior will potentially stay the same. This has the possibility to help to backstop markets.
The bond markets are now seeing a drop in yields as investors flee to less-risky assets and push prices up (prices move inversely to yields). This is a reversal of what we saw earlier in the week, as the Fed’s news on rates pushed yields up. Bond prices largely closed negative in January, and the return to historically less risky assets may be a silver lining that lifts bond performance.
Conclusion
Your long-term financial plan is built to withstand shocks like these. While we can’t know the full impact of the invasion or the duration of the crisis, the pressure points of increased inflation and extended supply chain disruptions have been part of the ongoing picture. Taking a cue from the Federal Reserve’s playbook of waiting to get data and letting geopolitical tensions settle before making moves with long-term impact can help individual investors with keeping their eye on the prize.
Comfortability in your plan is paramount, and if you are feeling uncertain, there may be moves you can make that will relieve your discomfort without upending your financial future. Keeping your long-term goals and horizon in mind when navigating volatility is critical.
We are always here to answer any questions or just have a conversation. We’ll be monitoring the situation for our clients, as we always do.