Stock markets worldwide declined this week as investors grapple with the implications of Russia’s invasion of Ukraine, rising inflation, and growing anticipation of higher interest rates being implemented by the Federal Reserve in the coming weeks and months. The developing conflict between Russia and Ukraine is an important reminder that geopolitical risk is an evergreen component of investing in global equity markets, which can be emotionally challenging to navigate as an investor. Headlines with words like “war” and “invasion” are alarming for us all and induce concern and thoughts of worst-case scenarios. But before considering any abrupt or drastic action, please consider the following:
- Few geopolitical events change the long-term trajectory of markets, no matter how tragic and severe they may be, or appear to be initially. In early 2014, for example, Russia invaded and consequently annexed the Crimean Peninsula from Ukraine. During the five weeks leading up to the invasion, the S&P 500 Index fell nearly 6%1. Shortly after annexation, the stock market leveled out and ended the year up over 13%2. A similar trajectory occurred in August of 1990 as Iraq invaded Kuwait, leading to the Gulf War. In the eight weeks following the invasion, the S&P 500 entered correction territory (a decline of 10% or more from a recent high)3. Just a year after the start of the war, the S&P 500 index was up over 10%4.
- The stock market appears to be digesting recent events, ascertaining what lies ahead for the global economy, corporate earnings, and the path of interest rates. While unsettling, market pullbacks are par for the course and certainly not uncommon. In fact, the average intra-year drop (referring to the largest market drops from a market high to market low during the year) has been approximately 14% for the S&P 500 Index over the last 42 calendar years5.
- Even after the recent decline, the broad U.S. market is effectively back to mid-2021 levels. Times like these remind investors that the stock market’s attractive long-term returns do not come without sacrifice and patience.
What should you do now?
Most importantly, don’t panic about the possible impact of geopolitical events on your portfolio. Keep the long-term in mind. Stocks offer higher expected returns precisely because they carry high risk. Last year, in 2021, stock market volatility was historically low, and risks became less obvious as stock markets marched higher. The last few days remind us of these inherent and inevitable risks. Remember that the attractive historic returns on stocks include many challenging timeframes, including world wars, recessions and depressions, high inflation, pandemics, terrorist attacks, and corporate scandals.
What will we do now?
We will continue monitoring the global economic situation and keep you informed of our observations and insights. We will continue to look for strategic opportunities to rebalance portfolios (which will probably mean selling bonds and buying stocks at lower prices) and harvest losses for tax purposes.
As always, we are humbled by the trust our clients have placed in us. Please do not hesitate to contact one of our financial advisors if you’d like to discuss your portfolio or overall financial situation.
1 Source YCharts, Inc.; data S&P 500 Index total return from January 1, 2014 to February 3, 2014.
2 Source YCharts, Inc.; data S&P 500 Index total return from January 1, 2014 to December 31, 2014.
3 Source YCharts, Inc.; data S&P 500 Index total return from August 1, 1990 to September 28, 1990.
4 Source YCharts, Inc.; data S&P 500 Index total return from August 1, 1990 to July 31, 1991.
5 Source FactSet; data S&P 500 Index price return for calendar years 1980 to 2021.