Market Update: Russian Aggression- Should You Be Concerned?

Before I get into the nuts and bolts of what is happening and how we as a firm view the market impact, I want to address this question: Should you be concerned? The answer to this question is the same for every market crash. You should be concerned ONLY if you are relying on your portfolio for income AND there is NO fixed income allocation in your portfolio. Allow me to explain, but first we must agree on the premise that you are investing for the long term, the market cannot be timed, and fear is the enemy of successful investing.

So back to my explanation. Let's say you have a $500,000 portfolio and it is invested in a moderate risk strategy composed of approximately 60% stocks and 40% bonds. This means you have about $300k in stocks and $200k in bonds/cash. Let's further assume you rely on your portfolio to provide you with $20k in income a year. During a market crash, your $300k in stocks may go down 10%, 15%, or even 20%. But, during market crashes, bonds and fixed income tend to perform quite well, so $200k of your portfolio is not crashing. 

The way we manage and trade portfolios emphasizes providing income from the assets that are not down. Put another way, the $200k that is in conservative holdings such as bonds can be used to provide income for 10 years before we need to worry about selling volatile stocks to provide that income. Ask yourself, are we going to be worried about this same issue 10 years from now? Will the market recover in 10 years? I happen to believe that the market will have long since recovered from this 10 years from now, perhaps even 10 weeks or months from now. (Although, Russia will still likely be acting like a jerk.)

Now to the matter at hand. No one hires me to be a geopolitical expert and I don’t pretend to be one. Unfortunately, markets are moved by geopolitical events such as the tragic events that are unfolding in Ukraine. Although I may not be a policy expert, I do know markets and have an informed opinion on how they will react. This week, Russia has invaded parts of Ukraine under what are widely viewed as false claims about Russian security and the safety of Russian-speaking people in Ukraine. Expectations of this invasion have caused increased market volatility in the past few weeks which have increased as the invasion has officially begun.

Not to make light of the situation, as I am very concerned about the images of death and destruction we will see in the coming days, but thankfully Russia is not the economic superpower it once was (despite Putin’s fanatical dreams). During the peak of the Cold War, it is estimated that the GDP of the Soviet Union was about 60% of what the U.S. GDP was. Today the U.S. GDP is over 13 times what the GDP of Russia is. At around $1.5 trillion, the Russian economy is smaller than the market cap of Apple ($2.5T) Microsoft ($2.10T), and Alphabet ($1.68T). 

The real issue at hand is not what happens to the stock market if we cut Russia (and occupied Ukraine) off from the world economic stage, as they were not players on that stage to begin with. The real issue is if this conflict escalates and/or how will this impact energy prices. Again, I’m not a geopolitical expert but I just don’t see this escalating to a multi-country war or heaven forbid WW3 as some talking heads have suggested. NATO thus far has shown a unified front which stands firmly against Russian aggression into other countries. The energy issue is a bit of a problem, one that can be solved but a problem nonetheless. The only real export that Russia has (other than cybercrime) is oil and much of Europe gets their oil from Russia.

Over the last decade, the U.S. has become increasingly energy independent. However, during the 2020 coronavirus crash, the price of oil collapsed as demand dried up instantly. Oil producers then shut down many of their rigs, as many U.S. oil rigs are simply not profitable when oil is below certain thresholds. You can see the total number of U.S. oil rigs over the last 10 years below.

As you can see, the number of U.S. oil rigs has begun to increase again after many went offline in early 2020. But we are still not back up to the pre-pandemic levels, and certainly nowhere near the 2014 highs (unironically, at the peak oil rig count in 2014, oil hit $100 a barrel. It just hit $100 a barrel for the first time since then today). This means that although in the short-term high oil prices are going to be a problem, the U.S. has the capability to ramp up production and offset the impact of Russian oil sanctions. 

We know that seeing your account balances go down can be stressful, but we also know that we have been through these situations before. Markets get fearful and overreact, spiraling down, but markets can also be greedy and overbought. The absolute best thing to do is keep a long-term perspective and weather the storm. We are here for you should you have questions and concerns. Please do not hesitate to reach out to your advisor.  

This commentary on this website reflects the personal opinions, viewpoints, and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Written by Brice Carter