Investors have understandably been transfixed by the unfolding invasion of Ukraine by Russia and the humanitarian crisis it has created.
Orion Advisor Solutions recently hosted a webinar with Orion’s Chief Investment Officer, Tim Holland, CFA, and special guest, Steve Pavlick, Head of Washington Policy Research for Renaissance Macro Research to discuss how the crisis might impact the economy and markets in the near-term.
As the Head of Policy at Renaissance Macro, Steve helps buy-side clients identify opportunities and price political, legislative, and regulatory risks in today’s dynamic public policy environment. He is a trusted public policy advisor and advocate with more than a decade of experience in Washington policy.
While no one knows how the conflict will develop and what its long-term geo-political impact will prove to be, Holland and Pavlick discussed developments to date, the ongoing policy response from the West to Russia’s actions, and potential impact to the financial markets.
The presentation offered three main themes:
The first is overt Russian military action likely stops and starts with Ukraine, Orion believes, as other countries in the region are either under Russian influence or NATO members. A Russian attack on those states would trigger Article 5 of the NATO treaty, compelling the alliance to come to their defense and beginning what could prove to be the deadliest conflict since WW II.
The second theme is that while geo-political events can drive market volatility near term, they historically have had little lasting impact on markets, as investors pivot back to what ultimately drives stock prices — earnings and interest rates.
The third is that the most likely economic impact of the conflict is additional inflationary pressure, as supply chains are disrupted and commodities are pushed higher in price, something we have seen with oil trading above $90 a barrel.
That said, the U.S., having become a leading producer of oil, is in a much more advantageous position today than during prior oil price shocks, a dynamic that should mitigate the economic damage from higher petroleum prices.
While the recent Russia invasion of Ukraine is unsettling, historically, these major geopolitical events have not significantly moved capital markets unless a recession develops globally or in the U.S.
Currently, U.S. economic growth is accelerating; however, economic risks are greater in Europe relative to the U.S. For example, Germany derives 30% of crude oil and more than 50% of natural gas from Russia. In the U.S., expectations are for the Fed to be relatively aggressive in tightening, however, if the situation deteriorates meaningfully, they do have a lever to pull.
Additionally, the Treasury market reduced the odds of a 50-basis point hike in March. Normally, geopolitical crises ultimately turn into a buying opportunity for investors willing to look past the headlines. Orion expects to see elevated market volatility for a longer period due to recent events.
Addressing Investor Concerns
Communicating effectively with your clients is always important—but especially during times of market volatility, when they may have additional concerns or simply need reassurance from an expert. It’s critical to be accessible and responsive. Here are a few points to consider during your client conversations:
- Short-term volatility is to be expected
- Markets tend to look past geopolitical events in the long-term
- Focus on fundamentals – earnings – interest rates – and economic growth
- Don’t lose track of the big picture
