Over the past few days, U.S. equity markets entered into correction territory largely due to the threat of war between Russia and Ukraine. With global leaders now responding to the Russian invasion, we are expecting to see increased volatility in the international markets as well as at home.
The following are our thoughts based on current information and our long experience navigating difficult markets:
How is the Conflict Impacting the Global Economy?
As of Friday (2/25) morning, the price of oil was down below $100 per barrel. However, earlier this week, the price rose above $100 a barrel for the first time since 2014. Global prices for oil and natural gas are likely to remain elevated and volatile amid geopolitical tensions, which could dampen economic demand.
The US and other governments have implemented severe economic sanctions against Russia.
Global food prices are currently at an all-time high. Since Russia is the largest international exporter of wheat, prices are expected to rise further.
Russia is a major producer of metals, including aluminum, which could cause additional supply chain issues.
How Might U.S. Equity Markets be Affected?
In the U.S., the conflict may fuel inflation, which has already been responsible for volatility in the equity markets.
A war between Russia and Ukraine would potentially create other economic disruptions that may influence the Fed’s decisions going forward.
A significant cyber attack would bring greater uncertainty to U.S. markets.
What are we Recommending and How are we Positioning Portfolios?
Given the rising uncertainty, it is important to focus on the broader topic of asset allocation across portfolios – the mix of cash, bonds, and stocks – and ensure they are consistent with each client’s risk tolerance and time horizon.
Assessment of account asset allocation is something we do regularly as part of our process, and it remains a priority of ours amidst the current turmoil.
Having ample cash/liquidity becomes especially important in times like these. We continue to recommend having any defined needs for capital set aside in cash or short-term bond funds.
Taking this measure guards against our needing to sell equities to raise cash during this volatile period.
We are staying the course and continue to own high quality equities for our clients. Indicators of quality that we look for include dividend and cash flow growth, and financial flexibility over the long term.
