The Resilience of Markets Through Dark Times
With the conflict in Ukraine, we may still see more volatility and fear impact markets, but in terms of investor portfolios, the message is perhaps bland, but comfortingly so. Stay the course with a diversified portfolio and keep a long-term perspective, however difficult that may be.
I wrote recently that the stock market correction we saw last month was probably not so special. History has shown that even after major declines, stocks recover within a relatively short time frame.
But we find ourselves yet again in the midst of bleak news. The news of Russia’s attack on Ukraine is hard to ignore. The BlackRock Investment Institute writes in their latest BlackRock Bulletin: “We now know what we are contending with: the start of a protracted stand-off between Russia and the West. We deplore the human toll and tragedy all this may bring.”
Indeed, the human toll looks to be devastating, and is far more concerning than anything market related. But questions do naturally come up from investors. What does this all mean?
When I’m feeling worried about the world and its market impact, I can often depend on my colleague Mark Peterson, Director of Investment Strategy and Education at BlackRock, to provide some perspective in his popular publication Student of the Market:
Each crisis at the time likely felt uniquely dark. And the current situation in Ukraine and Russia may be the most significant military conflict since the end of the Cold War. But recent experience has shown that investors would do well to see through volatility, and stay invested.
Yes, but what about…?
Is the answer really that simple? Well, no. We really do not know what the future holds in the short term. So this might be a good time to introduce a new format called “Yes, but what about …?”
While most investors can appreciate the concept of staying invested, markets can still be unpredictable, dynamic, and complex. So let’s tackle some common questions one by one.
Q: Yes, but what about oil prices?
Yes indeed. Russia is one of the world’s largest suppliers of oil, and with that supply chain disrupted, we are already seeing oil prices rising significantly. But the implication here isn’t necessarily that investors should move to oil (though holding oil and other commodities long-term may be right for some investor portfolios). Because while the value of oil went up, so did the value of some companies investing in renewable energy – possibly because the world is more incentivized than ever to accelerate the transition toward a sustainable world.1
Q: Yes, but what about the Fed? What will they do?
Last month, we saw the stock market drop more than 10% on the news that the Federal Reserve is planning to raise rates to combat inflation, with the backdrop that the economy is slowly returning to normal. As the oil shock worsens the problem of inflation, one might assume that the Fed would need to continue raising rates even more aggressively.
Not quite. Energy costs are fundamental to everything we produce – if the cost to heat the factory goes up, you have to raise prices or hire less people. And if consumers are spending more on gas, they are less likely to buy other things. This puts an overall drag on the economy. This puts less pressure on central banks (including the European Central Bank) to raise rates aggressively, as raising them too quickly could risk tipping the economy into a recession.
The end result? Stocks are perhaps in better shape than anticipated, as the risk of fast rising rates has decreased.
Here’s the chain of logic: conflict in Ukraine --> higher oil prices --> central banks may not raise rates as aggressively as feared --> stocks look to be in good shape.
This view was laid out in the BlackRock Investment Institute’s weekly commentary on February 28, as they upgraded their view on developed market stocks.
Q: Yes, but what about the economic sanctions on Russia?
Russia’s invasion of Ukraine has prompted sanctions by the U.S., the UK, and the EU, all of which have implemented expansive measures to block Russia’s access to global capital markets and limit the operational activities and abilities of Russian financial institutions.
All asset managers are required to comply with government sanctions. For BlackRock’s part, actions that impact index designs will be assessed and actions will be taken with the goals to minimize impact to client holdings and to avoid, to the extent possible, any significant market disruptions.
This may lead some investors to wonder whether they are exposed to Russian companies in their portfolios. Russia’s response has all but closed out the opportunity for investors to divest. But perhaps there’s good news here: Russia makes up a miniscule percentage of the global stock market – around 0.04% of global stocks.2 So while investors may have a small piece of Russian equities – particularly if they are invested in emerging markets, it likely represents a small portion of their portfolio.
The bottom line
The conflict in Ukraine is one of the most significant military actions in decades. It looks it may be a harrowing time for a prolonged period. Let’s all hope it resolves soon. In the meantime, we may still see more volatility and fear impact markets in the short term.
But in terms of investor portfolios, the message is perhaps bland, but comfortingly so. Stay the course with a diversified portfolio and keep a long-term perspective, however difficult that may be.