Global markets are under pressure on the heels of the Russian invasion of Ukraine. U.S. stocks are currently pointing down around 2.5%, and stocks in Europe are down more than 4%. Russian stocks are trading off about 35%, the largest one-day decline in the history of the index. As one would expect, there is a flight to safety, with the 10-year U.S. Treasury yield back below 1.9% and gold prices jumping, while crude oil and natural gas prices are spiking.
First and foremost, this incursion has the potential to become a humanitarian crisis and our thoughts are with the people of Ukraine. As discomforting as the headlines are, from an investment perspective, we would urge investors not to overreact. Panic selling has generally not been a winning strategy. There is little doubt that the Russian invasion complicates the global picture and adds another layer of uncertainty. However, as we have discussed in recent notes, our work shows that while geopolitical events often tend to cause a short-term market dip and choppy waters, unless they push the U.S. into recession, markets tend to rebound over the next 6-12 months. This is evident in the periods following the Soviet invasion of Afghanistan in 1979, the Iraq invasion of Kuwait in 1990, the Gulf War in 1991, and the Iraq War in 2003. (see table on p. 2) That said, in addition to other factors, the ongoing uncertainty around the Russia-Ukraine conflict keeps us underweight international markets, given Europe has greater reliance on Russian energy, and Russia itself is in the emerging market index and should place pressure on this asset class. While the U.S. market will not be immune to these events given the interconnectedness of the global economy and higher oil prices will hit U.S. consumers, the domestic economy is more insular than other developed economies. Importantly, unlike 30 or 40 years ago, the U.S. is now a significant energy producer.
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