Russia/Ukraine & Market Selloffs

Last Thursday, February 24th, Russian President Vladimir Putin ordered a “special military operation” in Ukraine early in the morning. News of that order was quickly followed by reports of explosions across Ukraine. Immediately following reports of the explosions, stock market futures plunged, opening over 2% lower than the previous day's close. Although opening lower, all three major indices (S&P 500, Nasdaq 100, and Dow Jones Industrial Average) ended up positive for the day ranging from +0.3% to +3.4%. The Russian invasion into Ukraine is an important reminder that in a more globally connected world, there are risks to global markets when geopolitical events such as this occur.

It seems counterintuitive that the markets would end the day of such an event in the black, as opposed to in the red, but it adds to the narrative that markets tend to be forward-looking. In the two market sessions (last Monday being closed due to Presidents’ Day) prior to Thursday’s invasion, the market had some selloffs being down 1.01% and 1.84% respectively as tensions were on the rise. Initial sell-off, and then recovery in somewhat quickly. In looking at other historical geopolitical events, we find that this kind of behavior within the markets is actually not that unusual at all, rather expected.

Market Sell-Offs from Geopolitical Events are Often Short-Lived

If you are getting the feeling that this is somewhat familar, a conflict in Ukraine, the markets have a decline, but ultimately rebound, then you may be actually remembering the 2014 Ukraine conflict and the annexation of Crimea. Following the events in early 2014, the market fell around 1%; however, 6-months later had recovered and advanced 8%, continuing to climb to an over 12% gain one-year later.

In light of last week’s conflict, Vanguard calculated average returns for the market in periods following major geopolitical events and found that the sell-offs that result from these events are fairly short-lived. See the chart below where the investment giant reviewed twenty-two different events and their impacts over an initial sell-off, and then stock market performance over the following six-month and one-year time horizons. What they found was that after an initial sell-off, markets have averaged a return of +5% six months later, and +9% one year later.

I do not intend to say that I expect the market to recover losses from earlier this year by the end of 2022, because as we all know, the past is not a guarantee of what future performance will be. I simply want to share these data points to continue reinforcing our belief that success in long-term investing means embracing the impact of short-term volatility that accompanies it. Remaining invested in diversified and goals-aligned portfolios helps to weather these times of volatility.

It is unfortunate to see the human cost of such an event, with hundreds of thousands of Ukrainians fleeing following the invasion. So please, hug your loved ones a little tighter tonight, and know that from an investment perspective, the events of last week have not changed the long-term focus we have for our portfolios.