February 23, 2022—The rapidly escalating Russia–Ukraine conflict has dominated the news flow and financial market action over the past few weeks. The S&P 500 on Tuesday hit a new low for the year, correcting -10.25% since January 3. Wilmington Trust’s Investment Committee has been in constant communication and meeting with increased frequency. As of Tuesday, February 22, we are maintaining our current portfolio positioning and continuing to closely monitor the evolving situation.
An investment lens
Russian troops stationed on the border of Ukraine or in Belarus have nearly doubled since January 30. Russian President Putin gave a speech on Monday directly challenging Ukraine’s sovereignty, which was immediately followed by recognizing Ukraine’s separatist regions of Donetsk and Luhansk. It is unclear whether this is the end of just the beginning of Putin’s attempt to reclaim what he sees as rightfully his. Some sanctions have been announced by the UK, Europe, and the U.S., while Russian’s Nord Stream 2 pipeline will remain on hold indefinitely.
The events transpiring in eastern Europe are of historic importance, but the investor’s lens must be focused on potential transmission to the economy and financial markets. As long-term investors, we are charged with determining what—if anything—will change in terms of our global economic outlook as a result of military actions in Ukraine.
There are a variety of possible outcomes and, given the consolidation of power in a single person in Russia, it is difficult for even the most seasoned political analyst to handicap the results. From our vantage point, our base case is the global economic outlook will not be altered to a degree that would warrant a change in our portfolio positioning. We retain a modest overweight to equities, including to U.S., international developed, and emerging markets. Risks are certainly elevated, and we are monitoring the situation closely to determine if political risk could spill into economic risks, most notably through a spike in oil prices that could damage the global consumer.
Geopolitical crises typically result in a near-term spike in volatility, and this month the CBOE Volatility Index increased to more than 2 standard deviations above the mean (Figure 1). However, an unintuitive reality is that this volatility almost always recedes with equity prices ending higher 12 months later. History is riddled with significant events that did not have a lasting impact on the market. Some exceptions include the 1956 Suez Canal Crisis, 1973 Arab oil embargo, and 9/11, each of which had unique, economic-related considerations to go along with the geopolitical issues. Timing the proper exit and entry points from a volatile, headline-driven market is also nearly impossible and could erode long-term capital appreciation versus a more patient approach.
Figure 1: Volatility elevated on fears of invasion
Chicago Board Options Exchange Volatility Index for S&P 500