The Russian invasion of Ukraine roiled markets last week, and for good reason. The price of oil increased to above $100 for the first time in nearly eight years, and stock market volatility, as measured by the CBOE VIX index, spiked upon the initial invasion. It has remained relatively high.Though the stock market has recovered much of the initial losses, the likelihood of a sustained period of choppy markets is highly probable.
To many observers, it may seem counterintuitive that the markets have improved in recent days despite the invasion intensifying and the violence escalating. In part, the reversal can be attributed to globalization and how intertwined economies are, especially as it relates to natural resources. Europe relies on Russia for about 40% of its natural gas imports. This constrains the severity with which NATO countries can exact a toll on Russia without facing retaliation that inflicts harm on them in turn. Because of this reality, so far, the steps taken have targeted Russia economically but fallen short of military involvement.
What are we monitoring?
From an investing perspective, here are some of the main drivers we will be monitoring:
1. Higher energy costs and inflation
Higher oil prices could lead to increased pressure on overall prices, following the most inflationary year in nearly 4 decades. We have limited exposure to the energy sector in our portfolio but could see allocating capital to sectors such as real estate and utilities that should provide stable income in inflationary environments.
2. Greater Volatility
Our portfolios are generally defensive as we have favored domestic over international equities, large caps over small caps, and value stocks over growth ones. We’ve also added to our gold position in recent months as a hedge against market swings. While the volatility tied to Russia-Ukraine may abate, conditions are certainly in place for other events to spur heightened investor sensitivity to risk. Importantly, the end of a lengthy period of peacetime in Europe takes place against a backdrop of elevated stock valuations, expected tightening by the Federal Reserve, low employment, and inflation concerns.
3. Less Correlated and Uncorrelated Assets
We are dedicating more resources to researching strategies and managers that are less correlated with (i.e., whose prices don’t move in sync with) public equities. Specifically, real estate managers with experience across economic cycles, income-focused strategies with uncorrelated income streams, and certain fixed income strategies.
A final note: our hearts and prayers are with the Ukrainian people. War is ugly. Many lives have already and will be lost unnecessarily.
As always, please feel free to contact us with any questions. We welcome your feedback!