I just stay the course. As with other crises, this too shall pass. Or not. But articles such as this (from a newsletter I receive) help keep me grounded.
Against expectations Putin went all in, invading Ukraine this morning or last night, depending on where you are in the world. This is a much bigger deal than when Russia invaded and annexed Crimea back in 2014, and financial markets are reacting as you might expect: Stocks are down and Treasury bond prices are up—gold and oil prices are up as well while cryptocurrencies are selling off.
Stocks aren’t down as much as you might expect though. Okay, the Van Eck Russia ETF (RSX) is down roughly 20% today. But the S&P 500 index is off just 1.4% as I record this. That’s not out of the norm for the way U.S. stock markets have typically reacted to major global events of this nature. Frankly, it’s not out of the norm for the U.S. market period.
This seemingly muted market reaction may be due in part to the fact that stocks were already down ahead of the event. The S&P 500 index entered correction territory on Tuesday—down 10% from its Jan. 3 high. In other words, the market was pricing in, at least to an extent, a bad outcome from the massing of Russian troops on Ukraine’s border.
How will the U.S. and Europe respond? I expect sanctions on Russia and aid to Ukraine in the form of weaponry, but the situation is incredibly fluid. War is a tragedy and I never mean to downplay the human impact. But you want my take on investments, not geopolitics, so what are we as investors to make of these events?
First, when I look at the history of markets and the onset of military conflicts, stocks on average gained ground over time. From the onset of the world wars to the Cold War clashes to fighting in the Middle East, you only need to look out six months to see that the Dow Jones Industrial Average averaged a 7% gain after the start of the fighting. That’s not a long-time horizon and reflects the enduring value of investments in companies that provide the services and products that we demand in our daily lives—during war and peacetime.
I know this doesn’t quite match up with what you might expect. But it’s precisely why investors need to take the 30,000-foot view and recognize what you’re actually doing when you invest in stocks. Stocks are a vehicle for investing in companies that provide the products and services around the globe that people want and need. That doesn’t stop just because Putin has invaded Ukraine.
Everyone you see today got up this morning, turned on the TV, probably ate and drank something, probably turned on a computer, used some products and demanded some services to get their day going. Maybe they took a vitamin or called in a refill for a drug prescription. They will continue to do so. Health care companies? A major place to have money. Tech companies? A major place to put money. Will home demand dry up? Hardly. I could go on.
Also, consider what I said earlier about stocks already being underwater. Yes, the S&P 500 index just slid into correction territory, but the pain has been more widespread for far longer. As of Tuesday night—so before the invasion—more than 80% of the small-cap stocks that make up the Russell 2000 index were down 20% or more from their most recent highs. And more than a third of those small stocks were down at least 50% from those peaks.
Or you could look at the tech-heavy NASDAQ Composite index where nearly half of its 3,000 constituent stocks were 50% or more below recent highs. Again, I could go on, but the point is that many, many stocks were already in bear market territory or worse. That’s why some stocks are actually rallying this morning as bargain hunters have begun to look for opportunities among the rubble.
So, as you reflect on your own portfolio, count to ten before reacting. It’s only 12 hours into an evolving conflict. Sure, if you’re a trader you’ve got to respond—I suppose. But if you’re an investor keep in mind that opportunities are created during crisis. If you need to sell some stocks so you can sleep at night—that’s fine. Otherwise, keep calm and carry on.
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