What Russia-Ukraine War Means for Investors and Advisors
Wage pressures may also slow before year-end. Labor participation remains below pre-pandemic levels. Given continued progress containing and treating COVID-19, labor participation should continue to rise, helping to ease wage pressures.
The likely long-term outcome is for inflation to remain above pre-pandemic levels but fall sharply from today’s levels. The Fed may well declare victory if inflation falls to the 2.5%-3% level that many consumers and investors expect.
Advisors should avoid overreacting to geopolitical events.
Geopolitical events provide important but imperfect guidance. Equities were higher six and 12 months after events such as the Iranian hostage crisis, Soviet invasion of Afghanistan, Iraq War, and 2014 Ukraine conflict.
Although the impulse to trade is highest in times of heightened uncertainty, market volatility tends to be most damaging to forced sellers. Advisors should encourage clients to maintain enough liquidity in the form of cash and short-term, high-quality holdings to provide safety and liquidity in turbulent times and avoid having to sell stocks at an inopportune time.
Despite a highly uncertain near-term outlook, the long-term prospects for economic growth and equities remain favorable. Long-term investors should stay invested in stocks while looking for opportunities to take advantage of market dislocations that have caused some good companies to sell at a discount to their long-term prospects.
In the short term, U.S. equities are a likely safe haven. Europe’s geopolitical and energy insecurity will weigh on sentiment and corporate earnings until the path of conflict in Ukraine becomes clearer.
European and emerging markets stocks, however, trade at multi-decade lows relative to U.S. stocks, so the potential for a relief rally is high. Cyclically oriented stocks offer value if the war in Ukraine is contained, an energy crisis is averted in Europe and China’s policy-easing gains traction.
Longer-term bonds remain risky investments, given elevated inflation and tighter policy from most central banks; shorter-term bonds hold more pockets of value than was the case much of last year.
Daniel S. Kern is chief investment officer of TFC Financial Management, an independent, fee-only financial advisory firm based in Boston. Prior to joining TFC, Daniel was president and CIO of Advisor Partners. Previously, Daniel was managing director and portfolio manager for Charles Schwab Investment Management, managing asset allocation funds and serving as CFO of the Laudus Funds. Daniel is a graduate of Brandeis University and earned his MBA in finance from the University of California, Berkeley. He is a CFA charterholder and a former president of the CFA Society of San Francisco. He also sits on the board of trustees for the Green Century Funds.
