Some perspective on the grim situation in Ukraine and what could happen in markets.
The invasion of Ukraine is a serious and scary escalation in tensions between Russia, Europe, and the United States.
Before we dive in to what it could mean, let's take a moment to think about the many people in Ukraine who are suffering and dying. And let's also take heart with the ordinary Russians who will suffer from the sanctions, instability, and economic damage.
"Those who do not learn from the past are doomed to repeat it." I hope and pray that the people of the world will compel their leaders to heed the lessons of our parents and stop them from condemning our children to parallel the wars of the 20th century.
Let's talk about some possible implications for markets and our economy.
Given Ukraine's critical pipelines and Western sanctions on Russia, the crisis may lead to higher energy prices, which will trickle down to higher pump and heating fuel costs.1
Sustained price increases could challenge the Federal Reserve's effort to control inflation, so we're keeping an eye on that as well.
What could happen in markets?
Extreme volatility, as we've already experienced, is very likely. Another correction (or even a bear market) is definitely possible.
What does history teach us about market reactions to geopolitical shocks?
History shows that stocks usually recover quickly from geopolitical crises.
I'll add a disclaimer that the future doesn't perfectly match the past — but it often rhymes.
Let's take a look at some examples from other invasions and wars.2
Here's the key takeaway: short-term, markets usually react badly. However, a year later, markets have historically recovered.
Will they always? In every case? That's impossible to say. Investors often get scared and pull their money out of the markets and seal their losses as they miss the recovery.
The study of 29 geopolitical events since WWII shows a general trend toward short-term losses in the first weeks and longer-term gains over months.2
A note: "geopolitical event" is a very antiseptic phrase for horrible things like bombings, wars, invasions, attacks, and really fails to encompass the full cost in human misery.
Let's never forget the truth behind the numbers.
We can't know or control what happens next. We can hope, pray, donate, and speak out.
And we can focus on what's in our control: Ourselves, our actions and reactions, and our strategies for uncertain times.
Let's hug the people we love extra tightly today and be very grateful for our blessings.
Daniel Ruben, MD, MPH, MBA
1 - https://www.nytimes.com/2022/02/27/business/oil-prices-russia-ukraine.html
2 - https://www.reuters.com/markets/asia/live-markets-what-history-says-about-geopolitics-market-2022-02-18/
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