Tensions in Ukraine
“Never bet on the end of the world. It only happens once and those are pretty long odds.” -Art Cashin, as told to him (2022)
As we all now know, Vladimir Putin and his Russian military have invaded Ukraine. We are by no means geopolitical experts, but in our view, the Russia/Ukraine event has less to do with the purely nationalistic ideas Putin has domestically sold this conflict on, and more to do with energy, which is the lifeblood of the Russian economy and vital to their national security. Russia supplies 40% of Europe’s heating fuel, mainly in the form of natural gas. One of the two aging pipeline networks through which the gas is transmitted runs through Ukraine.
Ukraine, which has seen the rising living standards in countries like Poland and Latvia (which have joined NATO and the European Union), had lately shown a growing desire for increased ties to the West. Russia relies on oil and natural gas sales for about 60% of its export revenues. Any hinderance to access the European market combined with a west leaning Ukraine is a threat to its economic and national security. Putin could never allow this, and his recent actions have shown his willingness to put a stop to it altogether.
If any good can come out of this, it would be the United States and Europe together taking a reappraisal of their respective energy policies, to the detriment of Putin’s Russia. Only the history books will tell us how this plays out.
When equity investors receive their end of February statements, they may have statement shock. The recent selloff has been exacerbated by the rising tensions and now full-scale military conflict in Ukraine. The major indexes are well into correction territory. The Nasdaq is down about 15% year-to-date, the Russell 2000 (small caps) are down 11%, and the S&P 500 is down 10% as of the date of this writing. As we’ve mentioned in the past, the average intra-year decline of the S&P 500 index is approximately 14%. Even though the outcome of the Ukraine conflict is unknown, the downside volatility we have seen so far this year is very normal up to this point.
Historically speaking, geopolitical risks to the market tend to be short term. The result of the current conflict is unknowable, but as Art Cashin stated above, long term investors should never bet on the end of the world. We hope the Ukraine situation ends with as little destruction and death as possible, and the world can return to a more peaceful state sooner than later. In the meantime, please call us anytime if you have questions on your account or would like to discuss anything else.