Ukraine Invasion: Impact on the Markets

With the latest news out of Ukraine, we wanted to provide background on our current view of the economy and how this event may impact investment portfolios. In addition, this is a reminder that we’re here for you so don’t hesitate to reach out if you want to talk. Let’s dive in!Prior to the invasion of Ukraine, we were already dealing with headwinds in the market. These include high inflation, projected interest rate hikes, supply chain disruptions, and the unwinding of the FED’s balance sheet. For more detail on these items, please read our article from January here.

Russia and Ukraine

The Russian invasion of Ukraine now adds another unique event that the markets must digest. We expect major sanctions on Russia over the coming days from both the US and NATO allies. In the short term, we will likely experience increased oil and commodities prices as well as supply chain disruptions from raw materials that are supplied by Russia and Ukraine. In combination, these will likely result in additional inflationary pressure that the market must contend with.

How the US Market Has Reacted During Previous Geopolitical Events

What does all of this mean to us as investors? In our opinion, it means that the next few months will be volatile as the markets do not like uncertainty. Investors need to be prepared mentally for the roller coaster ride that may occur as additional data is released on inflation and as news continues to pour in from Ukraine.

We believe it helps to look at how the US market has reacted during past geopolitical events to gain an understanding of how long it might take to recover. Below is a chart with details on how the S&P 500 (largest companies in the US) performed historically during these types of events, sorted by the most recent.

What is interesting from the graph is that in all cases, the market fully recovered within 12 months with the average time of recovery being 47 days and the average drop being 5%. The S&P 500 has already fallen 7% over the past week at the time of this writing, which implies that the market was already pricing in the likelihood of a Russian invasion. The market can fall further but it is helpful to realize that the market tends to recover relatively quickly from these types of events.

Historical Volatility of the US Market

It is also important to focus on the history of the US market in general. The historical graph below shows the maximum percentage that the S&P 500 dropped (red dots) in a given calendar year as well as the final gain or loss of the market (grey bars) at the end of that year.As you can see at the top of the graph, the average annual drop is 14% and despite this, the markets ended positively in 32 out of 42 years (76% of the time). In addition, on average, the market falls over 15% every three years and falls over 20% every five years. This historical background can help provide perspective on what seems like unprecedented times but happen more often than we tend to remember.

What We Are Doing

For individuals nearing retirement who need money for living expenses, we have already positioned your portfolios in a way which ensures that your day-to-day retirement is not affected by a market drop. We have done this by holding money outside of the markets in either cash or bonds. These are the investments that we will pull money from while we wait for the markets to recover.For individuals who have non-retirement accounts at Schwab, we are analyzing each account to see if we can take advantage of current investment losses by incorporating a tax strategy called "Tax-Loss Harvesting". Essentially, it means that we sell the funds with losses, lock in the loss for tax purposes, and then immediately purchase comparable investments so that we still participate in the market recovery. This will allow taxpayers to offset up to $3,000 of their income in 2022 and potentially offset their future capital gains.In addition to the individual portfolios that we manage, we are analyzing the flow of earnings reports that have been reported over the past month. We are specifically watching to ensure that the companies we are invested in are financially stable with strong cash flow and little to no debt. We are also watching indicators such as consumer spending, wage growth, unemployment rates, and manufacturing indices to ensure that the economy is still on stable footing for long-term growth.For more information on our investing philosophy, read our article here.

What You Can Do

For individuals with cash available, this is a good opportunity to buy into the market at depressed prices. This is only applicable for money that you don’t plan to touch for the next 3 to 5 years as there is no way to know whether we are near the bottom of the market.

Conclusion

We hope that this historical perspective and recap of our thoughts is helpful as you deal with the emotions that are present during market downturns like these.If you’d like to talk through any questions or concerns, know that we’re just a phone call away!