It has been a week filled with grief, anger, solidarity, pride and fascination as the world has watched the Ukrainian peoples' triumph at repelling the Russian military juggernaut. Europeans (especially those in the border nations to Ukraine) are rising up to accept and welcome refugees into their homes, provide meals and supplies to those fleeing the invasion, and stand in protest to Vladimir Putin's assault on a peaceful, sovereign, and democratic nation. Americans are also doing as much as they can to stand with the Ukrainian people from thousands of miles away - anecdotally, I read a story about Americans booking Airbnb rentals in the capital city of Kyiv knowing full well they would never step foot in them but wanting to get money into the hands of Ukrainians directly. These black and white periods of global unity against tyranny and oppression are rare and in context short-lived - let us hope and pray that this period is the same while at the same time unity with our global partners is strengthened and remains.
Still the question in the minds of investors is - "Will the global investment markets stand together as firmly as the people of Ukraine and their supporters?" Investment markets have no moral obligation to remain steadfast in the face of opposition. They have no sense of national pride spurring them on to defend against intruders. Investment markets are heartless and rightly focused on valuation (i.e. how much businesses are worth at any given point in time). Right now it seems that the investment markets are running for the hills instead of standing to fight. The Russian invasion of Ukraine and its expected effects on the global economic engine have called into question what were already high valuations for businesses globally. If businesses are going to see lower profits because it is more expensive for them to produce goods and services and/or because they cannot sell those goods and services to as many people as they once could they technically should not be worth as much now. Valuations truly are as simple as that. However, times of economic retrenchment and their subsequent negative market influences tend not to last too long...certainly not forever. Moreover, investment market retrenchment due to geopolitical events (e.g. war and invasions) tend not to last as long as other market shocks.
The Vanguard Group, Inc. recently produced the following research on past geopolitical events and their effects on investment markets: Vanguard - Ukraine and the Changing Market Environment. According to the research, in almost every case, the Dow Jones Industrial Average saw positive returns in the 6 and 12 month periods following the event. Of course, this time may be different. But, it may not. My opinion - take it for what it is worth - is that the investment markets were just looking for a reason to reprice business valuations. Russia's invasion of Ukraine just happened to provide a really good excuse for investors to do what they wanted to do anyway. The investment markets' current correction has less to do with geopolitical events and more to do with the fact that asset prices got ahead of themselves - in other words, I am guessing that if Russia had invaded Ukraine when the P/E ratio of the S&P 500 was 14 rather than 26 (all else being equal) we would not be seeing the investment markets react as negatively.
At the same time, I do acknowledge the heightened uncertainty of economic and market outcomes due to the potential impacts of Russia's actions. We will almost certainly see higher commodity prices - the most tangible will be oil and gas prices. Will Central Bank policy around the world be altered? Will our own Federal Reserve put a pause on its expected rate hikes this year? Will supply chain issues persist or intensify? Uncertainty abounds, and investment markets tend to not like uncertainty. I expect the rest of 2022 will tend to be a bumpy ride for investors. The best possible thing to do is remain diversified in your investments, make a financial plan and review it amidst the uncertainty, and as always keep a long-term perspective. I will make one bold prediction - 2022 will not be the undoing of humanity. If I am right, better investment days are ahead. If I am wrong - well, you won't be able to tell me "I told you so." Jokes aside, pray for the Ukrainian people if you are so inclined. Send them aid as you can. And hug your family and friends tonight - your return on that investment will outweigh any other you could make.
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