Background on the Situation:

Following a period of failed diplomatic reconciliation, Russian president Vladimir Putin officially declared war with Ukraine last night. Shortly thereafter, a series of military advances were made by the Russian army into Ukraine, extending all the way to Ukraine’s capital city, Kyiv. Leading up to today’s events, the United States and many of its allies, including both NATO and non-NATO nations, issued a number of sanctions against Russia in an attempt to stave off future aggression. Russia, seemingly unscathed by the economic pressure applied to it, has brought war to Europe for the first time since World War 2.

As for U.S. policy, President Biden publicly stated on February 22 that the U.S. will continue to provide defensive assistance to Ukraine, but has no intention of fighting Russia. However, as war breaks out within Europe, many nations, including the U.S., may feel compelled to engage militaristically. To this point the battle is regionally contained, but the recent events increase the likelihood that the battle spills over into other European nations. The spillover effect that heightened tensions and market volatility might have on Central Bank policy remains unclear, but as of this writing the Fed has made no indication that the 2022 expected rate hikes will be abated by the geopolitical unrest.

Some Thoughts About the Future:

The path forward is admittedly murky at this point.  The base case scenario for many assumed that Russia would be pleased with the headway it had made in eastern Ukraine and would opt to work diplomatically within the regions occupied to tighten its grip on power (think China & Hong Kong circa 2019).

Clearly economic sanctions did not have the anticipated effect on deterring Russian aggression.  Russia, over the past number of years, has built up more than $600B of financial reserves, decreased its exposure to the US dollar, and has even developed a domestic interbank clearing system as a back-up should it be cut-off from SWIFT, the global messaging network used to facilitate cross-border financial transactions. All of these actions served to dampen the effect of sanctions.

How events unfold over the coming days and months is difficult to predict and their impact to the global economy over the short-term is even harder to surmise. Key items that we will be monitoring include future military action taken by Russia, the escalation of sanctions and their likely spillover effects, as well as the response by nations dependent on Russian energy and wheat production.

Market Reaction:

While equities around the globe are under pressure, Russian stocks have borne the brunt of the impact thus far, down nearly 40% overnight and 50% this week.  Traditional safe-havens including bonds and gold are up modestly, while oil prices spiked to levels not seen since 2014. 

Overnight Change* Week to Date Month to Date
S&P 500 -2.6% -5.4% -8.8%
Developed Intl -3.8% -5.3% -4.6%
Emerging Markets -4.9% -6.8% -5.0%
Russian Stocks -38.4% -47.0% -48.7%
10 Year Treasury Rate (%) -13 bps -7 bps +8 bps
US Dollar 1.1% 1.2% 0.7%
Gold 3.0% 3.4% 9.2%
Oil 8.1% 9.5% 13.1%

*Overnight change on equities based on futures pricing. Week & month-to-date include overnight change.

Global markets are expected to remain volatile as events unfold. The most impacted sector, given Russia’s position as one of the world’s largest oil and gas suppliers, is energy. Sanctions imposed on Russian oil producers and the halting of the Nord Stream 2 gas pipeline from Russia to Germany have influenced energy prices higher.  Whether energy prices continue their climb, relatively flatten, or begin to decline is unknown and we expect heightened volatility to remain in the immediate future.

Portfolio Implications:

A balanced portfolio comprised of 60% global equities and 40% bonds aligned with Greenleaf Trust recommendations has approximately 0.3% exposure to Russian markets. The majority of this allocation is in Russian equities (0.26%) primarily through one fund used for emerging market allocations.  An emerging market debt fund held in fixed income allocations has a 1.2% exposure to Russia, which equates to just 0.02% of an overall portfolio.  Clearly, the onset of war in Europe has market implications that extend globally, but in aggregate our clients have minimal exposure to Russia.

We will continue to monitor developments and communicate our views.  In the meantime, don’t lose sight of the fact that your financial plan, and the investment portfolio supporting that plan, were developed with a long-term lens and maintaining discipline during periods of uncertainty is the most reliable course for growing and preserving wealth.  Please contact any member of our team if you have questions.