We are currently witnessing a major geopolitical risk come to fruition. Late last night, explosions resounded as Russian troops moved into Ukraine, and global markets are falling as a result. Russia has acknowledged it is targeting military targets, and apparent cybersecurity attacks have also been reported in recent days.
President Biden is scheduled to announce significant sanctions against Russia, and NATO has committed to its defense.
As we pray for the safety and security of the people of Ukraine, it is worth understanding historical context around geopolitical events and how they affect the stock market. Historically, this type of occurrence has not had a major, long-term effect on markets. The chart below, prepared by LPL, shows how stocks have reacted to global military incidents.
While similar events in the past have not significantly hampered equity returns in the long-run, this is serious. Putin has clearly not been truthful in recent days, and there is a risk that this crisis becomes bigger, pulling the US and other countries further into the conflict. Additionally, the risk of cyber-attacks cannot be discounted. This escalation, along with drastic increases in commodity prices, complicates the Federal Reserve plans to hike interest rates. Rising prices with lower growth may lead to the potential of stagflation.
In light of this, it is not surprising that the market has entered correction territory. In fact, investor sentiment is quite low; AAII investor bullishness sits at 19%, with bearishness at 43%. This bull minus bear spread of -24 has, historically, been associated with positive stock returns in coming weeks and months. This gives us some optimism that the risk may have been, partially at least, factored into stock prices before the invasion.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.
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