February 2022: Russian-Ukranian Conflict

 

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How have markets like the S&P 500 done during geopolitical events in recent history? See Vanguard's data in the attachment.

We are still just days into the Russian invasion of Ukraine. It seems obvious to say we have no idea how long this will last or what potential outcomes look like, but here are some of the ways we are thinking about it:

 

Thoughts from an Economic Perspective

  • Keep in mind that Russia is considered an emerging market and comprises just 2.9% of the FTSE Emerging Markets All Cap China A Inclusion Index (the index used for Vanguard FTSE EM, ticker=VWO). Using our typical target of 15% to emerging markets in the equity portfolio, a client’s direct exposure to Russian equities is likely less than 0.5% of their total portfolio.
  • The US and other countries are placing increasingly severe sanctions on Russia. These sanctions will likely take some time to have major impact, and the repercussions are unknowable at this time.
  • Global economies have already been dealing with high inflation coming out of the Covid-19 slowdown. With food and energy prices impacting CPI, it will be interesting to see how CPI changes in the following months. Similarly, central banks across the globe have been arriving at different decisions about if/when to increase interest rates. Prior to this week’s events it was widely expected the FOMC would raise interest rates in the US during their next meeting in March. We don't know yet if/how these recent events will impact the decisions that our and other central banks make.

What to Tell Clients?

  • Each advisor has their own version of the “stay calm” or "stay focused on the other things that are under your control" messages.  It is important to communicate with your clients in a manner that suits your firm and is consistent with your approach.
  • Remind clients that timing the market doesn’t work. Markets don’t like uncertainty, so expect more volatility as the events continue to unfold.
  • Client portfolios have been constructed with a variety of assets. Diversification is important—including high quality bonds, which should serve to reduce volatility.
  • While geopolitics may impact market returns in the short term, economics drive markets over the long term.
  • We would suggest not making material changes to your portfolios based on these circumstances.
  • This article linked here has great data showing how the S&P 500 has done through other geopolitical events (though we admittedly don't support or refute the author's positions). This may help you remind clients we have been through periods of turmoil before.
  • Attached is a one-pager from Vanguard which highlights in a different way how geopolitical events have historically been short-lived from a markets perspective.
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What can we do as advisors?

  • Continue to be there for clients, with empathy over their concerns.
  • We will continue to rebalance portfolios for you weekly as opportunities present themselves.  Several indexes are in correction territory currently.
  • Tax-loss harvesting opportunities may present themselves. We will continue our tax-loss harvesting procedures on the 15th of each month.

Other items of interest

  • This broadcast from Dimensional (24 min) shares some detailed discussions of markets, exposure to Russia, and trading practices at DFA; This broadcast and the white paper below reveal some of the DFA-specific trading practices that help guide through events like these. (Added March 2, 2022)
  • Click here for DFA's approach to "Navigating Geopolitical Events" white paper. (Added March 2, 2022)
  • Click here for Russia weightings in DFA funds (Added March 3, 2022)

 

As always, we are here to support you and your client’s needs. Let us know if you have any questions.