By Steve Dinnen
We can all agree the Russian invasion of Ukraine is a cruel, pointless humanitarian disaster. It’s difficult to comprehend the inhumanity that is unfolding. But from the perspective of an American investor, it’s not so difficult to see the impact of war by way of the current rattling of the markets. War is not good—for people or for markets, especially when a world power like Russia is involved.
Economically, Russia accounts for just 3% of the world’s GDP (11th-largest, overall). But as Kent Kramer (pictured right), chief investment officer at Foster Group, pointed out, it plays an outsized role in several key areas. Russia supplies 11% of the world’s oil (the U.S. is first, with 20%), and accounts for 17% of its natural gas. Russia also exports a lot of precious metals, industrial metals and wheat. As the country busied itself with, and then launched, its invasion, it basically took itself out of the world market for everything it made.
Other oil producers—OPEC nations, for instance—can turn on the taps to boost supplies. Steelmakers and metals producers outside of Russia can ramp up, as well. But that will take time for the global market to step in and fill any void created by Russia’s absence.
Added to this mix is U.S inflation. In February it registered a 7.9% gain over a year earlier, the steepest climb in decades. Megan Rosenstiel (pictured below), a partner at West Des Moines wealth management firm Gilbert & Cook, noted that the inflationary impact of higher energy and other prices, along with the prospect of decelerating economic growth, also has complicated the Fed’s strategy to guide interest rates higher. Already, she said, the probability of a 50 basis point (0.5%) interest rate hike at the Fed’s March 2022 meeting seems less likely than it was just a week ago.
Inflation could have some staying power. But Kramer suggested the effect of the Ukraine war will resolve itself. “Geopolitical selloffs are typically short,” he said, though they are traumatic.
This would include the Cuban missile crisis, the Brexit vote in 2016 and the Iraq War. On average, markets had returned to normal and actually posted gains of 9% within a year of each of these underlying events.
When dealing with short-term volatility, you should “keep an eye on immediate cash-flow needs,” Rosenstiel said. “Near-term spending should be planned for accordingly with sufficient assets set aside in safer, more predictable investments or cash equivalents. This will allow you to access the funds while letting your equity holdings stabilize and recover.”
“The truth is,” she added, “there’s always good news and bad news if you dig deeply enough. … There are a lot of things still going right for the U.S. economy. The underpinnings of the economic expansion remain – the housing market is high, consumer net worth is at an all-time high. As the pandemic wanes and economic activity is reopened, consumer spending is increasing.”
Let’s take that as a vote of confidence.