With the recent events in Ukraine and Russian occurring, it is easy to feel unsettled and stressed about the market volatility. However, many of the major geopolitical events in history have not significantly moved the capital markets except for those causing a recession globally or in the U.S. Many of these events create some economic panic and investors to exit the markets.
Negative events due to similar crises have almost always proven to be temporary. For many major global geopolitical events, markets will take early hits and then begin to improve, in some instances profiting off the conflict. This tends to happen because investors are willing to look past negative headlines to find new opportunities in the markets. As time passes, markets are led to a strong rebound by continual assessment of risk and adjustments to expectations. The same can be said with inflation. Russia’s responses to sanctions can increase inflation and disrupt critical energy, food, and industrial commodities. Central banks will then be forced to decide when to take action to combat inflation.
Various data by investment companies indicate that staying true to your investment goals allows you the greatest probability of success. For example, the Gulf War saw equities rise 5 months after it began and 9/11 and the Iraq War saw market rebound after 2-3 months. More generally, data from 29 geopolitical crisis events found that the US equity market was on average 2% higher 3 months after an event while 69% of the 29 events saw a higher equity market with an average return of 5% for the sixth-month period.
On the other hand, data during US war periods or conflicts tend to reflect lower volatility of asset classes, higher equity returns, lower bond returns, and higher inflation than during the full period.
European nations will face greater economic risks than the U.S. overall and in the equity market. Ultimately, Russia will suffer the most due to the increasingly imposed sanctions. Even so, a Russian economic recession will only have minimal effects on the markets and global economy. The biggest impact will come with shortages of certain Russian-produced commodities such as food and oil. In return, inflation could be elevated for longer. The Federal Reserve will need to focus on the stability of the market over the rising oil prices.
This will create an increased pressure on monetary policy which will be felt from central banks globally. Policy rates may have to increase in order to slow inflationary pressures. Often, having a long-term investment approach can help protect from uncertainties like geopolitical conflicts. It is important to prioritize overall valuation to help assess and identify opportunities. Be sure to stay up to date with the news to monitor the potential events and the financial impacts that follow.
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