Winds of Change… And The Russian Invasion of Ukraine

Mark D. Troutman, PhD, CFP®

I’m sure many of you, like Kirk and I are watching the unfolding events in Ukraine with shock and horror. This chain of events is quite personal to me, having served 28 years in uniform stationed in Europe, Asia and the US with two combat deployments to the Middle East, all aimed at deterring conflict.

Even now, I teach an economics course within the Georgetown and Johns Hopkins securities studies programs, where subjects discussed in the news such as energy flows and financial sanctions are regular seminar topics. The economic impact of such conflicts is my domain, but I would be remiss to call us all first, to remember the human cost of conflict. Our hearts break for the many who have suffered loss in this unfolding crisis, and we pray for the swift restoration of liberty and accountability for those responsible for needless conflict.

We have been speaking with many of you over the last few days about the impact of unfolding events in Europe. Specifically, many wonder where they might end, and what steps you should take to secure yourself, your family and your finances. This article will not speculate on the outcome in Ukraine. War never unfolds in the manner combatants intend as they start. However, we can identify some prudent steps that are appropriate for these times.

First, expect more volatility and uncertainty as the weeks progress. The Russian government has clearly planned its moves for years, and their leadership will not be easily swayed by temporary setbacks. Likewise, the Ukrainian people have a long and proud history of resistance, and they will staunchly defend their homes. This crisis will take unexpected turns before it concludes, and markets will be volatile as a result. Simply stated, it is unwise to “play” short term turns in markets such as these.

At one point on February 24th, the S&P 500 was down 5% from its opening, and almost every market commentator predicted 10%-15% of additional loss. After President Biden spoke on Thursday afternoon, markets recovered, moved into positive territory and continued to climb through Friday. The S&P closed Friday within eight points (0.2%) of its Monday opening. An untrained observer would conclude that the market has “fully priced in” the conflict in Ukraine. Don’t believe it.

Rather, expect more such roller coaster rides in the weeks and months ahead. Historical evidence indicates that unexpected conflicts on average bring market downturns of 10%-20% as they unfold. Once conflicts conclude, markets recover quickly. This is a key reason why investors should not be fixated on the headline news risk but rather focus on history which tells us that the recent correction will likely be short-lived. In fact, if historical evidence is a guide, financial crises (e.g. The Great Recession) should concern us more than wars – they bring average market downturns of 33%.

First and foremost, client portfolios generally hold more than enough liquidity in the form of fixed income and cash, to weather any near-term storm. At the same time, we will continue to be judicious about where and when we invest in the equity markets on your behalf, and as always, we will seek to wisely exploit the investment opportunities that develop as a result of market volatility.

Second, this conflict has unique features. The conflict is taking place in a region that involves significant resource flows. Ukraine is a major provider of food and basic materials to the European Union and China. The sanctions announced by the US and its European and Asian allies deeply impact energy (oil and natural gas), commodity and financial markets.

Supply chains are already tight, and our earlier market analyses indicated ample evidence to support a view of mounting inflationary pressures. The developments in Ukraine will add to commodity shortages, and they will stoke inflationary fires and further roil supply chains. So, we double down on our conclusion that winds have shifted and that portfolios must evolve to favor the Value investment style, in lieu of the Growth investment style, as the preferred protection mechanism against inflation. For more insights on the rotation away from growth toward value, please see Kirk’s recent article “Are You Prepared for “The Great Rotation?”

Third, the developments in Ukraine place central banks in an untenable position. Their usual reaction to crisis is to provide liquidity. Having been late to curb credit growth, the Federal Reserve and major central banks are in the difficult position of having to restrain inflation amid a crisis. They are likely to favor easing, which reinforces inflation. So, this enhances the imperative to protect your portfolio against unforeseen inflation.

Fourth and finally, a new aspect of this conflict is the potential for cyber-attacks. We had a taste of this new warfare domain in the recent Colonial Pipeline incident, which impacted fuel supplies flowing along the eastern corridor for several months. Russia and its allies have highly developed internet attack capabilities and have demonstrated the willingness to use them. Many companies have realized this new domain of conflict and protected themselves. Many have not. There is a high probability that Russia will attempt to attack key infrastructure, which could lead to further market volatility.

On a personal level, ensure that you have updated your virus protection and backed up key files. Kirk Capital Advisors, along with the support of our custodians, has sought the best in cyber security protection for your accounts. You should be vigilant, yet calm. We certainly are.

While deeply unsettled by the assault on eighty years of relative peace in Europe, I remain optimistic in the resilience of the United States and its community of free nations. Likewise, the unique resilience of the US economy has weathered wars, political and financial crises, and pandemics. Mr. Putin, I firmly believe, will learn the lesson that other autocrats have learned throughout history: that the sons and daughters of liberty are fearsome adversaries once aroused.

Protect yourself, weather the storm, and focus on a long term strategy to protect you and the ones whom you hold dear. We stand ready to assist you in that calling. ■ 

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