Don’t let the headlines guide your investment decisions

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We certainly live in exciting times.

The Russian invasion of Ukraine has profound implications for the whole world, politics, future behaviors and certainly your investments in the capital markets. As governments around the world attempt to manage the human tragedy, other consequences will also loom.

The heightened risk and uncertainty resulting from the situation in Ukraine complicates the Federal Reserve’s plan. The Fed plans to raise rates through 2022 to fight inflation, but it may now pause to consider whether the time is right to withdraw easy money policies given other risks facing the market .

Parts of the market that have taken advantage of the potential for higher interest rates, such as regional banks, have performed very well in recent months, but will be vulnerable to downside if the prospect of a higher net interest margin on loans decreases.

This war is likely to extend the impact on commodity price inflation, which has already been a concern for the Federal Reserve and investors. Oil, natural gas, industrial metals and agriculture, including wheat and corn, are all affected in the Russia/Ukraine region. The important question is how well the world handles these disturbances.

One possibility is that the invasion reduces inflationary pressures resulting from high demand for goods. While oil prices are expected to remain high due to low supply levels in Europe and heavy dependence on Russian oil in the European Union, high oil prices due to armed conflicts are not something something the Fed can control.

Scary headlines could spur demand for goods due to general fear and anxiety and could give the Fed reason to handle this rate hike cycle much more cautiously than currently expected. In this situation, in the absence of a broad European conflict, this could well represent a boost for US equities in the context of continued solid earnings growth.

You should certainly expect to see the return of a Cold War-era geopolitical risk premium. Forays into the Middle East and elsewhere since the fall of the Soviet Empire generally had only a short-term impact on global markets and were considered limited in geography and duration. Russia’s current rhetoric is forcing investors to rethink the likelihood of greater conflict as well as the added strain on global trade in a new Cold War environment. The effects will be considerable.

Expect in-depth discussions on the adequacy of the military budget. Since the end of the Cold War, the US military budget has been a smaller part of GDP. This amount could increase as we perceive threats from Russia and China. Obviously, increased spending will put more pressure on the entire federal budget process and will likely increase the debt further.

The lead up to major geopolitical events tends to have significant volatility. Markets do not like the unknown. As the situation evolves and Russia’s endgame becomes more apparent, expect volatility to decrease. Rapid and complete Russian success, though likely at first, is not certain. Do not forget that Ukraine is fighting for its motherland. Russia is not. There are already some big anti-war demonstrations in Russia. A long war without decisive results is a bad omen for Russia. To a large extent, the duration of this war can determine the duration of market disruptions.

In any event, expect to see the turmoil and disruption of this war, but also the relief of the impending end of the pandemic. The economic situation may reorganize, but global GDP will continue to grow despite rising energy costs. Note that these costs may spur the development of other energy sources faster than expected.

A fundamental principle is that long-term investors are rewarded with higher returns in the future when they buy investments at depressed prices in times of great fear. Acknowledging that this situation is complicated enough that one should not expect the immediate gratification of a quick return to new highs given the multifaceted impact of Russian aggression, Fed tightening, other financial bubbles and the risk that China will use the Russia/Ukraine situation as a precedent for action against Taiwan.

Financial and investment changes should never be made because of short-term headlines.

Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s degree in business administration from the University of California, Berkeley. Contact him by email at [email protected].

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