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MARKET BULLETIN: RUSSIAN INVASION OF UKRAINE

By Renata CoimbraFebruary 25, 2022Article, Market Commentary
No Comments

By Ronnie Cox, SVP, Investments, Pensionmark

On February 23, 2022, after several weeks of build-up and anticipation, Russia
began a full-scale invasion of neighboring Ukraine, launching the largest war to
occur on the European continent since World War II. First and foremost, I must
acknowledge how tragic and painful this time is for the Ukrainian people, and
our hearts and thoughts are with them. As a market observer and investment
advisor, it is our job to understand current events and try to distill them in
the context of investing for our clients. And while there is significant
uncertainty about the road ahead, I’d like to try and put these current events
into context and discuss their likely impacts on global economies and markets.

As of this writing, Russian forces have launched a full-scale assault on
Ukraine, with attacks against major cities, including the capital city of Kyiv.
In response to these actions, the United States, the European Union, and other
major western allies responded with a series of sweeping sanctions targeting the
Russian financial, energy, and transportation sectors along with direct
targeting of Russian individuals1. Global markets reacted swiftly with steep
equity selloffs in Japan, the United Kingdom, Germany, Russia, and numerous
other countries. In the United States, equity markets opened Thursday morning
with steep selloffs as the Dow Jones Industrial Average reached correction (a
10% drawdown from its market peak) territory and the Nasdaq touched bear market
(a 20% drawdown from its market peak) territory. Oil markets initially surged
with Brent Crude oil futures topping $100 a barrel. The U.S. dollar rallied
against most currencies, particularly those in Europe. Although international
markets did not fare as well, the U.S. markets began to reverse course as
investors digested the implications of Thursday’s fresh round of sanctions and
the potential impact on the U.S. economy and businesses. The Nasdaq, which was
down over 3% to start Thursday, ended the day up over 3.2%2. With that context
in mind, it is important to try to make sense of why the markets reacted in this
manner and to highlight the potential risks as we look forward.

Certainly, while anticipated for several weeks, this war in Ukraine was a shock
for markets and introduced more uncertainty to an already tense global market.
Equity markets typically sell off in times of uncertainty as assets move into
relatively safer investments. In Europe, that uncertainty remains
extraordinarily high, as the European continent continues to be largely
dependent on Russian oil and natural gas. Any additional sanctions against
Russia could result in retaliatory supply cuts, forcing much higher energy
prices across the continent.

Further, European countries are much closer to the conflict and could be more
vulnerable to the war’s spillover effects, including a mass migration of
refugees out of Ukraine. The United States appears to be more insulated from the
current conflict as the number one producer of oil globally3 and is therefore
far less vulnerable to supply shocks than the European continent. While the
United States could feel the impact of supply shocks, it has far more tools at
its disposal to weather those shocks.

Additionally, President Biden has made repeated assurances that the United
States will not engage militarily in the conflict in Ukraine. He has made a
clear distinction that the United States would meet its obligations if any NATO
ally were invaded, but Russia has shown no signs of moving beyond Ukraine at
this point.

Lastly, Biden made clear today that he would do everything in the
administration’s powers to limit the effects of these sanctions on the U.S.
consumer that may manifest in the form of higher energy or food prices4. These
factors appeared to have calmed domestic markets as we saw investor money flow
into U.S. assets and domestic markets retrace their losses on Thursday.

With all that said, there is still uncertainty ahead. Vladimir Putin has shown
to be a belligerent autocrat with little deterrence. Russia remains a top
producer and exporter of oil, natural gas, food, and raw materials. If the
Russian government were to retaliate against global sanctions, they could cut
these exports and disrupt global supply chains, further aggravating our already
elevated inflation situation. Of most concern, Russia is a nuclear power, and
Vladimir Putin warned of consequences we “have never seen” if the West
intervenes.

TAKEAWAYS FOR INVESTORS

Undoubtedly, this is an alarming time; and there is much left to play out on
this front, so I am sure investors are looking for guidance. The first piece of
advice I would offer is that it is important to plan, not panic during times of
uncertainty. The tragic images and videos of war streaming on our televisions
and through our phones evoke a significant emotional response. This high
emotional response can sometimes lead to rash decisions. Instead, focus on the
goals of your investment portfolio and think about the long-term implications of
investment decisions you make today.

The second piece of advice I would offer is that uncertainty in the markets is
more significant for those with a shorter time horizon. If you are a young
investor with decades left before you start drawing on your portfolio, you have
plenty of time to weather the uncertainty of the current state of the world.
However, if you are an investor nearing retirement and need to begin drawing on
your portfolio for income, uncertainty becomes a measure of risk that should be
factored into your portfolio; measured adjustments into more conservative assets
should be contemplated.

Finally, I must emphasize the importance of broad diversification. It is
impossible to tell how this conflict will resolve, when it will resolve, and the
global impacts once it is resolved. Because of these uncertainties, it is
impossible to forecast who the winners and losers will be – having your assets
broadly diversified assists in spreading that risk and may help your portfolio
weather these uncertain times.

For any questions about your specific circumstances or investment portfolio,
please reach out to the Financial Wellness Call Center at (888) PEN-401K
(736-4015) or schedule a call with us.

Sources:

1World leaders slap sanctions on the Kremlin over invasion, Associated Press,
February 24, 2022.
https://apnews.com/article/russia-ukraine-business-asia-europe-united-nations-8744320842fca825ae4e4ccae5acbe34

2 Market Data, Wall Street Journal, as of market close February 24, 2022.
https://www.wsj.com/market-data?mod=Home_MDW_MDC

3 What countries are the top producers and consumers of oil?, U.S. Energy
Information Administration, December 8, 2021.
https://www.eia.gov/tools/faqs/faq.php?id=709&t=6.

4Joined by Allies and Partners, the United States Imposes Devastating Costs on
Russia, White House Statements and Releases, February 24, 2022.
https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/24/fact-sheet-joined-by-allies-and-partners-the-united-states-imposes-devastating-costs-on-russia/.

This material is provided for general information and educational purposes only.
Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser
registered under the Investment Advisers Act of 1940. Pensionmark is affiliated
through common ownership with Pensionmark Securities, LLC (member SIPC).

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