Russia’s invasion of Ukraine fanned volatility across asset classes. The situation is sad and unsettling. World order has changed, restoring something akin to the Cold War. It is hard to see meaningful cooperative spirit between Russia and the West anytime soon. Despite the grim realities, as it relates to capital markets, earnings results, inflation trends, central bank policies, and Covid are likely to be more important drivers.
Global stocks declined for a second consecutive month but are flattish since the actual attacks began. While the threat of war has been in the headlines for some time, investors had been largely focused on central banks and monetary policy. The war and resulting sanctions create uncertainties, which are leading the Fed and other central banks to tread more carefully. Some investors welcomed the prospect of slower interest rate hikes, even as commodity prices are spiking and inflation appears to be trending higher.
The war creates several new risks. The odds of armed conflict spreading beyond Ukraine is low but not zero. Sanctions have been more severe and coordinated than expected. It would not be surprising to see credit events bubble up from the shocking decline of Russian asset prices. Commodity prices have spiked, though we expect oil prices to gravitate back toward the rough cost of U.S. shale production over the remainder of the year. While investors should expect higher volatility to persist, emotional decisions driven by fear or greed are likely to prove counterproductive and timing the gyrations is almost impossible. Those invested in a thoughtful, diversified strategy are well positioned to stay the course in an unstable world.