Interesting what a difference a year makes. A year ago, we were in the midst of an economic revival by way of the re-opening surge. Vaccinations were being distributed, the end of winter days was in sight and people were making plans to emerge from their COVID hibernations without a care in the world. The “open trade” became a serious force propelling global stocks higher. Risks were few and far between.
The current day environment is almost the polar opposite. Financial markets have become preoccupied with the concerns of the day and have chosen to ignore the economic momentum. This week, the Russian-Ukraine conflict has been thrust to risk number one, supplanting the Federal Reserve raising rates. Not to worry, the finicky markets may choose a different concern in the next week or two. Russia is reminiscent of that kid in high school always causing trouble to gain attention. This week Russia seems to have gotten its wish. Similar to the 2014 Sochi Olympics, Russia waited for the Beijing Olympic closing ceremonies to exert its will.
Russia and Ukraine have a long-shared heritage. Over the centuries, they have been best friends as well as rivals. In a family setting, it might be referred to a sibling rivalry. The latest conflict is not absent precursory scuffles over the past 30 years with the dissolution of the Soviet Union. Recall, Russia and Ukraine were two of the founding nations forming the Soviet Union. Ukraine’s decision to leave the Soviet Union and embrace western ideals distanced its Russian brother.
Fast forward to 2014, Russia annexed Crimea with little resistance. Crimea is made up of mostly ethnic Russians giving Russia cover for the takeover. Ever since, emboldened Russian sympathizers in Ukraine’s eastern separatist region of Donbas resulted in skirmishes over the past eight years. Russia is using the sympathetic skirmishes, shared heritage, and defensive Baltic state NATO build-up to justify its interjection.
The current situation adds to the geopolitical crises over the past 100 years. Headlines of instability can be alarming as they are not typical of the normal news cycle. Geopolitical disruptions inject a new round of uncertainty. (Remember, uncertainty is the market’s kryptonite.) Financial markets have seen far worse incursions and undoubtedly will see future clashes.
While these episodes are geopolitically impactful with humanitarian consequences, this does not always mean there are implications for long-term portfolios. While markets may react with a pullback, what drives portfolios over years and decades is quite different. Over longer periods of time, economic growth, corporate performance, and valuations matter much more.
Foreshadowing crystal balls make for entertaining stories, but don’t really exist. We rely on an understanding of history, deductive reasoning, and a patient discipline to be your trusted steward of capital. We appreciate the trust you have placed in us as we move through this disturbing time in history.
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