As I sift through all the emails and market data over the past 24 hours, I’m reminded about the importance of having a sound investment plan and managing our emotions during these uncertain times.
Yesterday, North American markets posted one of the most impressive intraday swings in recent memory. Starting the day in negative territory, the equity markets clawed their way back and posted positive returns for the trading session. The tech-heavy Nasdaq was the biggest mover, swinging roughly 7% as mega-cap stocks, seen as a proxy for safety, started their recovery process.
While no one can predict with certainty how financial markets will react during a war or other conflict, one thing is clear: having a long-term view is likely your best ally in times of crisis.
Looking back, in most cases, acts of war rarely have significant or lasting impacts on markets. Instead, what we’ve seen are market declines that will last a couple of weeks, depending on the situation (see chart below). The actual change in the market is also relatively mute and often less significant than what investors might think. Historically, they've been more muted than the decline U.S. equity markets have experienced in January of this year. ⠀
The Russia/Ukraine situation remains fluid and will likely continue to deteriorate with a series of escalating actions from Russia, matched by sanctions from the West. This will continue to dominate headlines and be a driver of market volatility in the coming days and weeks and we are monitoring the unfolding situation. The portfolios are performing as designed, participating when markets trend upwards and declining less when they turn negative.
But for markets, we maintain the most important factor remains the pace of central bank policy tightening and the related trajectory of incoming inflation data. Russia and Ukrainian hostilities, while geopolitically significant, are unlikely to have a significant impact on broader global economic fundamentals. The US and other developed economies are seeing robust demand as the re-opening resumes after the recent Omicron headwinds.
It is this strong underlying demand, coupled with elevated inflation numbers (stemming from supply chain disruptions) compelling central banks to accelerate the removal of monetary policy. Central banks will be increasing interest rates sooner and more frequently than previously forecasted.
This uncertainty surrounding the monetary policy game plan remains the most critical factor for markets. While the Russia Ukraine situation can magnify near-term market volatility and behaviour, it is unlikely to have a measurable impact on these underlying fundamentals.
As we watch the global situation unfold, keep in mind what the great Warren Buffett said, "successful investing takes time, discipline and patience."