Russia Invades Ukraine – What Now?

Russian President Vladimir Putin made good on his promise to invade Ukraine on Thursday.  As a result, the S&P 500 Index sold off sharply before bouncing back into the close.  Front-month crude oil futures also climbed above $100 per barrel intraday for the first time since 2014 before giving back gains.  Market tensions indeed settled after President Biden’s press conference concluded on Thursday, but, on a year-to-date basis, US equities, on the whole, remain near bear market territory. 

A New Set of Risks

There’s little doubt that market participants have had a lot to contend with over the past few weeks.  More recently, it was the uncertainty surrounding central bank policy and whether the FOMC would aggressively raise rates in March to help stem the tide of higher inflation.  Now, investors not only have to make sense of what a Russian invasion in Eastern Europe might mean for corporate earnings but whether military conflict escalates to the point of sparking a world war, as some US politicians have suggested.

Make no mistake, there are many reasons to be concerned about Russia’s assault on Ukraine.  For starters, this move has arguably rewritten Russia’s relationship with the West after 30 years of peace following the collapse of the Soviet Union.  Certainly, some might suggest that this relationship changed when Russia invaded and took control of Crimea in 2014. 

Even so, as President Biden pointed out in today’s press conference, Putin’s ambitions to restore the Soviet Union could lead to further military escalations beyond Ukraine’s borders.  Indeed, a Russian confrontation with NATO-allied countries in Eastern Europe could escalate tensions along other territorial fault lines, leading to a broader global conflict.

Potential Conflict Beyond Ukraine

That’s why it’s essential to understand that the events unfolding in Ukraine are just one of many other territorial disputes across the world today.  And the most significant source of these disputes is China.  Indeed, after dismantling democracy and securing its hold of Hong Kong, China is arguably looking for an opportunity to finally take back control of Taiwan (a country staunchly allied with the US), potentially by force. India has also seen its fair share of confrontations with China as military tensions have centered on the Kashmir border for years. 

In Southeast Asia, North Korea, whose economy is mainly dependent on China, continues to agitate its neighbors with threats of military strikes even as its population starves.  And more broadly, China has a score to settle with several countries regarding its nine-dash line claims to the South China Sea.  Add in political instability and various proxy wars in the Middle East and Central Asia, and you could have the recipe for a broad-based global conflict.

Are We Headed for World War III?

So, is this the start of World War III?  Well, we hope that cooler heads prevail in the coming days and weeks, notably following the imposition of significant financial and economic sanctions placed by G7 leadership on the Russian economy.  Either way, China likely will be directionally key to broader global tensions.  To be sure, Beijing appears to be walking a fine line between appeasing the Kremlin while maintaining decorum with the West, potentially forestalling a broader global conflict.  Even so, in the coming weeks these sanctions likely could have a notable impact on the global markets and economy even without a hot war.  How is this possible?

Well, long story short, global energy prices are likely to rise as sanctions hit a vital producer of the world’s fossil fuels.  Additionally, restrictions on US technology exports to Russia could inadvertently spark a policy tit-for-tat with China and complicate an already strained global supply chain.  Indeed, much of inflation’s rise over the past year has been attributed to global supply chain issues resulting from Covid-related economic lockdowns. 

Amidst this geopolitical uncertainty, one silver lining seems to have surfaced.  And that’s the fact that it could be more problematic for central bank policymakers to raise rates aggressively without potentially pushing the economy into a recession with the threat of war looming.  Indeed, this realization among some market participants arguably led to a significant risk asset rally into the market close on Thursday.

What’s the End Game?

So, how will this all end? Well, we don’t have a crystal ball and can’t say with certainty how today’s events will unfold in the weeks and months ahead.  Nevertheless, what we do know is that similar geopolitical events have come and gone over the past century, yet global democracy has only become stronger as a result while risk asset prices continue to gain decade over decade.

Now, it goes without saying that Russia’s decision to invade Ukraine could have significant global economic and market implications.  So, from this perspective, what should individuals concerned about the prospects of military escalation do to best position their finances during this time of uncertainty?

Well, given the tenuous geopolitical and global economic backdrop, we believe that individuals on the path to mastering their financial independence journey should take a few steps to frame these uncertainties within the context of their portfolios and, more importantly, their broader financial plans.

Dealing with Market Uncertainty

To start, turn off the news and take the time to remind yourself of your long-term financial goals.  During times of crises, we often find ourselves consumed with ever-changing news flow and yearning to take some form of action.

Oftentimes, however, the best course of action during times like these is to stay committed to the priorities you’ve set out to achieve for the future.  Don’t get distracted by the near-term noise.  Indeed, your long-term financial plan and disciplined investment strategy was created to help you navigate times just like these.

Next, try to avoid timing the market where possible.  Even after reviewing your financial plan, you may be tempted to make near-term investment decisions in your portfolio that may have adverse consequences over the long term.

For example, if you had sold into the market open on news of Ukraine’s invasion, you likely would have missed the strong rally into the market close.  During these times of uncertainty, many investors are best served by managing risk in their portfolio rather than by trying to divine market moves hour-by-hour or day-by-day.

And that brings us to our last and final point: manage investment risk.  To manage risk in your portfolio you’ll likely want to focus on two things you can control: 1) having adequate cash on hand and 2) ensuring that your portfolio is properly aligned with your long-term goals.  To the first point, consider having enough cash on hand to cover living expenses or other expenditures over the next 9-12 months.  Doing so could prevent you from selling securities from your portfolio at an inopportune should market volatility linger for longer.

Second, now may be the time to ensure that your portfolio has an ideal mix of stocks and bonds aligned with your strategic asset allocation framework.  Periodically rebalancing your investment can help ensure that you’re taking the ideal amount of risk in your portfolio, given your current stage in life.

At the same time, you may want to ensure that your portfolio holdings reflect a basket of stocks with solid earnings potential while holding higher-quality credit in your bond holdings. 

Only time will tell whether the current situation will escalate to a broader conflict or settle more amicably.  We hope that substantial financial and economic sanctions coupled with a solid political resolve from Western leaders will convince Putin to end his military incursion in Ukraine.  Until then, we anticipate market volatility to ebb and flow with the news cycle.  For now, avoiding the noise and committing to your long-term financial plan will not only give you peace of mind during this time of uncertainly, it likely will also enable you to continue your journey toward financial independence mastery.