What has been happening in the markets?

A new dimension of risk has entered the financial markets amid Russia’s attack on Ukraine. Stock market volatility has risen sharply along with energy prices. This unnecessary geopolitical conflict is not something the markets needed when they were already dealing with rising inflation and preparing for an expected cycle of interest rate hikes from most of the world’s central banks.

What is likely to happen in the markets and economy going forward?

We expect market volatility to continue over the next several days or weeks as uncertainty around the situation in Ukraine persists. In addition, rising energy prices and further potential disruptions in global supply chains tied to Russia will undoubtedly add to global inflationary pressures. In turn, the outlook for global commerce and macroeconomic growth might also be affected in the short term, particularly the broader European continent, given its dependence on natural gas from Russia and its proximity to the conflict, which could affect business confidence and earnings prospects. However, there are many companies, industries, and countries broadly across the world that the Russia-Ukraine war will likely not significantly impact, both in the short or long term.

From a historical perspective, geopolitical conflicts like this have not had a long-term impact on financial markets unless they materially and lastingly alter the global growth or inflation trajectory. As a result, historically, stocks have recovered from geopolitical events, as they rarely have a long-term impact on the broader business cycle. (See Figure 1.) While it is still too soon to know for sure how this will all pan out, we believe markets will inevitably recover, particularly if monetary policy remains relatively accommodative.  Although the Federal Reserve is still likely to raise interest rates this year, the expected pace of rate increases may be slowed depending on how the recent events ultimately impact markets and economies.

Is Capstone recommending doing anything or making any portfolio changes? 

We will continue to monitor the situation and markets but are not currently making any asset allocation changes in response to the most recent developments. When uncertainty is extremely high, like it is now, accurately predicting both the outcome of geopolitical events and the financial market response is very difficult. Therefore, investors have been best served by not making rash decisions regarding their long-term portfolio positioning.

Portfolios remain fully invested and managed strategically rather than tactically based on the day-to-day news cycle. Despite current volatility, we remain optimistic long-term about the markets and economy. We believe risk assets will recover despite a bad start this year with stocks most recently hitting correction territory (down over 10%). (See Figure 2.) An environment of above-trend economic growth, rising corporate earnings, and low real rates generally support risk assets. Despite our optimistic long-term outlook, we continue to recommend a diversified and balanced approach to portfolio asset allocation. Times like this prove how important it is to avoid overly concentrating and taking unnecessary risks in portfolios.  

Fear-inducing headlines and commentary will continue throughout this situation, and most will have a marginal impact on the markets, and some will have short-lived material impacts. Regardless, we will continue to closely monitor portfolios, opportunistically rebalance when needed, and look to conduct tax-loss-harvesting where and when it makes sense. Moreover, for portfolios sitting on material cash balances, we continue to believe that this is a good opportunity to accelerate dollar-cost average investing plans into stocks, real assets, and bonds. 

Market movements are impossible to predict, particularly in times like this, which we’ve seen before. Therefore, tactical portfolio management by switching between investments and cash is not an enduring investment strategy. When investors drastically change their long-term course based on what feels like a short-term sure thing, they’re likely to end up caught by surprise and racked with regret. Moreover,  discipline will continue to be the most critical key to a successful long-term investment plan.

Disclosures:

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by Capstone Financial Advisors, Inc. (“Capstone”) will be profitable. Definitions of any indices listed herein are available upon request. Please contact Capstone if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investment decisions should always be based on the investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.