Broker Check

Viewpoint - Making Sense of Geopolitical Events

March 15, 2022
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The past couple months have seen the U.S. and world markets experience volatility to levels we haven’t seen since Spring 2020.  This can lead to uncertainty and concern about short and long-term goals.  We want to briefly share what we’re seeing and how we’re viewing the current markets as they experience volatility related to a number of issues, including inflation concerns and the Ukraine/Russia crisis.

Over the past couple months, we’ve seen the S&P 500 (among other indexes) fall 10% or more.  While significant, it is important to note that we had not seen a 10% correction since Spring 2020 in the midst of COVID.  After a market run-up like we’ve seen over the past 18+ months, it is healthy for a market to take profits and dip in price.  Throughout history, 10% corrections are common and are a natural part of investing.  With that said, we recognize it is not easy to watch a dip like this.

 

Like you, we’ve seen the headlines over the past couple months as Russia aggression builds.  Our first thought is to the loss of lives and the families who have been permanently and temporarily torn apart.  Our prayers are with all involved.

From a financial perspective, this has recently come to a head and has spilled over into US market returns.  As part of our partner research, we’ve reviewed historical geopolitical events to understand how markets react in these times.  As we look at 22 distinct geopolitical events dating back to Pearl Harbor, we see an average pullback of -1.1% on the initial day.  A bottom is typically established in about a month, down -6.1% on average.  And a full recovery occurs within three months on average.  We recognize that no geopolitical event is “average” and historical data does not predict future performance, but recognizing historical returns in times of uncertainty can provide context to the current situation. (Source: LPL Research 1/24/2022)

 

We also recognize that we cannot accurately time geopolitical events, let alone market reactions.  For a case in point, the day that Russia formally invaded Ukraine (Thursday, Feb 24, 2022), the S&P 500 closed up 1.5%, the NASDAQ closed up over 3.3%, and the Russell 2000 closed up over 2.6%.  (Source: LPL Research 2/25/2022) History and public/media perception would have led you to believe that the market should fall have fallen on the day of such a critical geopolitical event.  However, it did not. 

 

Historically, some of the largest gaining days occur in close proximity to the largest declining days.  To react to one (a down day) can lead to missing another (an up day).  Again, looking at data, we recognize this can have a significant impact on returns over long periods of time.  We do not intend to jeopardize your long-term success by attempting to time the market on a short term basis.

 

When it comes to markets, we also know that they are far more complex than a single input (i.e. inflation, Russia invasion, earnings, interest rates, etc).  Markets react to a myriad of data every second and price accordingly.  To say there are concerns in one (i.e. Inflation or Russia Invasion), does not mean there are concerns in others.  And it is some of these other inputs that can have an outsized impact to market pricing (i.e. Company Earnings/Profit).

 

We also recognize that any significant dip like this can offer new opportunities to buy at a cheaper price than a few weeks ago.  As part of the rebalancing practice in our managed accounts, we review various thresholds within your account and will make adjustments to maintain your risk tolerance and your target portfolio.  We have always talked about long-term investing and our approach in times of volatility do not change that viewpoint.

 

Your goals and financial future are of utmost importance to us.  It is to that end that we structure your portfolio in line with your risk tolerance.  This allows us to weather the storm, without jeopardizing your short, mid, or long-term goals.  Understanding your goals and financial future are also the reason we strongly encourage a financial plan.  This creates a roadmap of where we’re going, and it can offer clarity to your financial future.  If you’d like to review yours at this time, give us a call.

Investing involves risk including loss of principal. No strategy assures success or protects against loss. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Content in and opinions voiced in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market. value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.