Market Response to Russian Invasion of Ukraine
Russia’s threats and invasion of Ukraine have upset global markets and driven them lower to start the year. Losses and volatility are typical when the future course of events is highly uncertain. However, as shown in the graphic below, what happens in the short term usually has little bearing on future market returns.1
Intra-year market declines are much more common than one might realize. Every year since 1979, the U.S. market (represented by the Russell 3000 Index) has experienced an intra-year decline of at least 2.7%. In 1987, the market experienced an intra-year decline of 33.1% but still finished the year with a positive return.2
We are biologically hard-wired to respond to uncertainty with action. When we were hunter-gatherers, uncertainty looked like a lion waiting in ambush and action was a beneficial response. When it comes to markets, the opposite is usually true. Time after time, we have seen that sticking with a carefully designed, diversified allocation through ups and downs yields a better outcome compared to selling out and trying to guess when to buy back in.
As we saw in March 2020, early in the pandemic, what feels like the worst of times can, in hindsight, be a market bottom followed by a strong rally. It is also very possible we will see further declines from here. There are many players whose decisions will influence the trajectory of events as well as new paradigms at play, like economic sanctions of unprecedented size and speed of application, and cyberoperations assisted by commercial companies. Given the complexity of the conflict, it is impossible for anyone to predict the outcome or its effects on the global economy.
What we do know is that diversified portfolios are designed to weather uncertainty, and that human ingenuity, perseverance, and adaptability have enabled businesses and their investors to prevail even through difficult times, especially when they are on the side of democracy and freedom. The Ukrainian businesses switching from making farm combines to tank-stopping hedgehogs and metal road spikes, and turning malls into logistics warehouses are great examples.
While our portfolios are diversified, the emerging market funds we recommend have less than 1% of their assets currently in Russian companies and as of March 4, our largest emerging market fund provider, Dimensional, has announced they will be divesting from all Russian assets. We anticipate the others will follow shortly. The markets are signaling that the biggest fear right now is inflation, especially if Western nations choose to cut off the flow of Russian energy. Historically, value stocks have done better in inflationary periods than other areas of the market and we are seeing this with our value positions outperforming the growth segments of the market. With their heavier exposure to natural resource companies, we anticipate this trend could continue if commodity prices and inflation continue to rise.
Hopefully you can find peace of mind knowing that your Merriman portfolio will weather the current storm. If you want to act, you can feel confident in your ability to donate in support of humanitarian aid or the valiant fight of the Ukrainian people, or take action to help reduce dependence on Russian energy.
2 Dimensional Fund Advisors.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and noting contained in these materials should be relied upon as such. Past Performance is no indication of future results. The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks, which represent about 97% of all U.S.-incorporated equity securities. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.