What the developments in Ukraine may mean for investors
As of March 14, 2022
Markets have reacted negatively to developments surrounding Russia's invasion of Ukraine. In an already uncertain environment of higher interest rates, ongoing inflation pressures, and concerns the Federal Reserve may remove monetary accommodation too quickly, the added geopolitical tensions have caused investors to recalibrate risk and reward opportunities across the market.
It remains to be seen how investors will react to geopolitical developments over the near term. While stocks are likely to see continued volatility, there is historical precedent that longer-term investors could be rewarded by staying the course.
How markets are responding
In our view, much of the market's anxiety regarding Russia and Ukraine lies within the energy and commodity complex. Russia is the world's second-largest crude oil exporter and a critical natural gas supplier for Europe. In addition, Russia and Ukraine, combined, export a significant amount of grains to the world. Aside from the adverse ramifications of a Cold War, investors are concerned about impacts on inflation and global supply chains. In an already elevated inflation environment, rising energy and commodity costs could slow global growth more than expected, particularly throughout Europe.
While the backdrop for the U.S. economy should remain positive this year, it's a matter of actual growth versus expectations when directing stock traffic. Unfortunately, risks to growth this year appear biased to the downside at the moment. Thus, given current headwinds, stock prices are unlikely to generate consistent upward momentum over the intermediate term while growth impacts remain uncertain.
Notably, investors should expect a choppy trading environment as stocks remain sensitive to ongoing Russia/Ukraine headlines, inflation (notably across energy and commodities), the direction of interest rates, and Fed policies. For the time being, we believe prudent investors should lean on a diversified portfolio to help weather the volatility and stand by for a clearer geopolitical picture to develop.
Will higher commodity prices lead to a U.S. recession?
With crude oil prices higher by over 30% this year, this is an important question to consider. In our view, higher commodity prices alone do not cause recessions, but they can be associated with economic downturns.
Today, the U.S. economy sits on firm ground, supported by a strong labor market, healthy consumer balance sheets, and growing corporate profits. However, higher energy prices can threaten consumer spending, causing them to retrench in other discretionary areas, particularly among lower-wage earners.
And while the 1970s and 2001 recessions may come to mind, as energy prices were climbing in those periods, those eras were marked by more influential factors that contributed to the U.S. economy's downturn.
Notably, there are several periods in history where commodity prices climbed aggressively, but a recession did not form in the next 6-12 months. That said, Bespoke Investment Group recently noted that commodity price growth of 60% or more is consistent with a roughly one-in-three chance of a recession over the next 12 months, according to data going back to the late 1960s.
In our view, a critical factor in this equation is Fed policy reaction. If higher energy prices prompt the Fed to tighten monetary policies more aggressively than they otherwise would, the danger of a recession grows. While the Fed currently appears to be on a path to tightening policy/raising interest rates, our view at the moment is that the central bank is very sensitive to growth impacts.
As such, we believe the Fed is likely to exclude energy-related inflation pressures (due to pandemic/geopolitical conflict) when forming its policy decisions. In doing so, we see the risk of the Fed tightening too aggressively and choking off economic growth as a low probability at the moment — even considering the rapid rise in commodity inflation.
Key takeaways for investors
The world has been through many periods of global turmoil.
While no two geopolitical situations are exactly alike, history shows that stocks eventually rebound once geopolitical tensions ease. After the initial market shock of Pearl Harbor, WWII, the Korean War, Cuban Missile Crisis, Desert Storm, and 9/11, the S&P 500 Index regrouped, discounted the most likely scenarios, and eventually moved higher.
Long-term investors are generally rewarded by avoiding knee-jerk reactions during headline-driven volatility.
We believe successful investors adjust their lens out during heightened uncertainty and attempt to capture a more expansive view of the investing landscape. In doing so, we believe investors would find the current growth picture for the U.S. remains favorable, with longer-term investment opportunities beginning to emerge. We recommend investors avoid attempting to "time" the market or make material adjustments to their portfolio at this time.
The market will eventually find its way through all this uncertainty — particularly on the geopolitical front.
While there seem to be more questions than answers today, investors will ultimately come to some consensus on this war’s economic impacts and price those impacts into stock prices. At that point, volatility should ebb lower and prompt investors to refocus on new opportunities. Given the U.S. growth picture should remain positive this year, even with all the unknowns at the moment, we believe investors should maintain a "glass-half-full" investment approach.
Your advisor is here to help
If you have questions about current market conditions, consider contacting your Ameriprise financial advisor. However uncertain events may feel right now, your advisor is equipped to create an investment strategy that accounts for ongoing market change and takes a long-term view — at a level of risk that’s comfortable for you.
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