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As you may be aware, the stock markets have seen significant volatility over the past few days, in large part due to Russia’s invasion of Ukraine and the ripple effect that has on the global economy. Our Investments team has compiled some insights regarding this geopolitical situation, as well as the volatility of the markets and global economies.

 

The Russia-Ukraine conflict and its impacts:

With the announcement of Russia’s insurgence into Ukraine, commodity prices have gone up. Over the past decade, Ukraine has boosted its agricultural exports to the European Union, and has become a large exporter of steel, all while substantially declining these to Russia.  As a result, prices for corn, wheat, vegetables, and other agricultural commodities have increased significantly this year, both in Europe and in the United States. Increased exports of grains from the United States to Europe will potentially occur.

Another resource likely impacted by this is oil. Russia is a substantial supplier of natural gas to the rest of Europe. Exports from the United States to Europe of liquified natural gas have already increased, and will continue, which has driven up natural gas prices in the U.S. This has resulted in higher electricity prices in many part of the country, because at present roughly 40% of U.S. electricity is generated from natural gas.

However, we believe the Russia-Ukraine impact is highly unlikely to trigger a substantial economic downturn worldwide. In most parts of the world, economic growth remains robust (on an inflation-adjusted basis). Economic activity may in fact improve as supply chain difficulties are resolved over the next 9-18 months, absent any additional economic shocks.

 

Inflation

 

As previously mentioned, the Russia-Ukraine conflict is resulting in greater commodity-price driven inflation. This is in addition to supply chain issues, increased consumer demand for goods, and the pandemic’s impact on the production and transport of goods around the world. Due to these factors, the U.S. inflation is running at 7.5% year-over-year, and in the very short-term we may see consumer price inflation rise, as well.

There are a couple of factors that may help combat the rise of inflation. First, the Federal Reserve is still expected to raise short-term interest rates by 0.25% in March, with additional interest rate increases likely over the remainder of 2022. Second, the increased production of goods and improvements to the supply chain will likely lower the costs of many goods including new automobiles, appliances, electronics, and others by late 2022, and into 2023. Additionally, the cost of food will likely fall as higher agriculture production reaches the market and supply chain issues are resolved.

 

Stock Market

Stock markets are inherently dynamic. History has shown that predicting future stock prices is nearly impossible, and that no one can accurately foresee what will occur today, tomorrow, or next week. ARGI’s Investment Philosophy is centered around the belief in long-term efficient capital markets, and not short-term market fluctuations. In other words, we believe a long-term data-driven strategy can be more beneficial than frequently trading based on emotions.

While investor confidence in the stock market can quickly erode, it can also quickly emerge. In times of geopolitical events, including those involving local or regional conflicts, stock markets rose significantly in the six months following the downturns. Strategic asset allocation, with timely rebalancing, can help investors secure the returns of the capital markets over the long-term for those who “weather” the emotions often resulting from adverse market events. Despite recent volatility, stocks continue to play a substantial role in many investors’ investment portfolios, and in delivering inflation-beating returns over the long-term.

 

By enlisting the assistance of a qualified financial professional (and relying on their skill and expertise), you can be sure that investment decisions are based on facts and are undertaken to suit your long-term objectives – rather than seeing ad hoc reactions to market events. Wall Street may be turbulent at times, but your financial advisor can assist you in establishing decisions based in fact and less in emotion.

 

Sources

  1. https://www.foxbusiness.com/politics/white-house-says-americans-should-expect-higher-energy-prices-amid-russia-ukraine-tensions
  2. https://www.eia.gov/energyexplained/electricity/electricity-in-the-us.php#:~:text=Natural%20gas%20was%20the%20largest,in%202020%E2%80%94about%2019%25.
  3. https://www.bls.gov/cpi/
  4. https://www.thehindu.com/news/international/explained-how-dependent-is-europe-on-russia-for-its-energy-needs/article65064946.ece
  5. thttps://www.cnbc.com/2022/02/22/russias-ukraine-incursion-could-complicate-the-federal-reserves-interest-rate-decisions.html
  6. Bloomberg (commodity indexes)
  7. https://www.kpvi.com/news/national_news/russias-move-on-ukraine-could-affect-u-s-farmers-nebraska-ag-experts-say/article_d6bc306b-bc2c-5444-887f-4b1b922d851e.html
  8. https://www.businessinsider.com/inflation-outlook-supply-chain-consumer-spending-price-growth-economic-forecast-2022-2
  9. https://www.winsightgrocerybusiness.com/retailers/after-hits-omicron-supply-chain-costs-walmart-eyes-brighter-year

 

*This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results. Asset allocation does not guarantee returns or insulate you from potential loss. Diversification cannot ensure profits or protect against loss.

 

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