Ukraine Crisis – Investment Planning for the Unplanned

Investment Commentary – March 2014

written by Steven Belchetz, President and Chief Investment Officer

Famed Nobel laureate Nils Bohr once stated that “prediction is very difficult, especially if it’s about the future”. While Bohr garnered distinction for a deep understanding of physics, his quote could just as easily apply to financial market forecasting.

Investment predictions are often difficult to pin down due to market shocks. Seemingly random periods of geopolitical discord and natural disasters can alter the market environment, with the consequences only becoming clear in retrospect.

The current conflict between the Ukraine and Russia has been top of mind lately, and investors are understandably jittery given its unknown potential impact on their portfolios. However, history shows that market downturns in response to unpredictable events tend to be short-lived. The table below shows 14 examples of how US stocks reacted to various crises since World War II.

SHOCKS TO THE SYSTEM: Market Declines and Recoveries Since WWII

With respect to the Russia/Ukraine situation, the US market (Dow Jones) declined 1.4% on Monday March 3rd, the first trading day after Russian troops entered the Ukraine. However, similar to past geopolitical shocks, the US market quickly recovered, and is now trading at or close to all time highs.

Predictions being what they are, the data above is no guarantee that the current situation in Crimea will not escalate to the point where it has a material effect on the world economy and investor portfolios. If sanctions are imposed against Russia, the nation could pull back on its energy exports to Europe. With a third of the region’s natural gas sourced from Russia, a disruption in supply could stave off the nascent economic recovery in the Eurozone. This move would also be detrimental to Russia, given that the nation’s budget is heavily reliant on energy export revenues. Additionally, an actual armed conflict would certainly roil financial markets. However, with both sides well aware of the economic consequences, the more likely scenario is the “war of nerves” we’ve seen to this point.

Ultimately, although there are uncertainties, there is a low risk that the current standoff between the West and Russia becomes financially relevant. While certain regions could be affected, the downside risks in a globally diversified portfolio should be mitigated.

It is worth mentioning that the problems in Venezuela (which have not received as much press as the Russian-Ukrainian situation) also have the potential to affect the global economy due to the significant oil production in the country.

At T.E. Investment Counsel, we believe in managing portfolios for the long term. Geopolitical events are impossible to predict and therefore little action can be taken in portfolios to combat short term crises. Ultimately, this would be a form of market timing and we do not believe that anyone can time the market on a consistent basis. Therefore, sticking to your long term plan is the best of course of action in terms of managing the portfolio through various geopolitical events and financial market shocks.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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