Special Episode: Our Take On What Russian Aggression Means For Your Investments
- Recap of the current situation - 0:47
- Historical context - 4:32
- How the market digests the information in the short-term - 7:18
- Impacts of being economically integrated with Russia - 11:37
- How we approach investing - 15:11
- What's the Fed going to do? - 18:40
Watch the full episode on YouTube:
Full Transcript:
Benjamin Haas 00:02
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Good afternoon, Adam. Thank you for joining me today. People are going to read the title of the podcast. A rather fluid situation we're dealing with and while you and I both love to be a little upbeat and talk about fun financial planning things, this is not going to be one of those podcasts.
Adam Werner 00:45
This is not that.
Benjamin Haas 00:47
So brief intro. Certainly we want to put this out there as people are dealing with, I'm sure. different layers of anxiety with market volatility but also just this care for humanity. We are far from experts on Russia and Ukraine. We certainly would guess that people have varying degrees of understanding of what's going on and different headlines but we do want to try to be experts on client communications and financial planning so let's talk about it today. Let's talk about what this major world event is kind of doing in the world of investments and financial planning and hope it's helpful for people.
Adam Werner 01:32
So I guess we'll just start with a recap of where we're at currently. Today that we're recording is Thursday. I'm looking at the calendar, the 24th. So, as for us here in the States, it was overnight, at least that I saw notifications, that the invasion was underway. So as of this recording, that has happened. Russia has invaded different parts of Ukraine, then it was the meeting of world leaders which I guess is probably still occurring. We just saw some headlines, there's more sanctions that are going to be coming on Russia but those details have not yet made it to our eyes and ears. I'm sure there will be a lot of back and forth over the coming days and weeks, and as most people are probably seeing, again, not just limited to today in real time but I'm sure over the next days, weeks, months, whatever this turns into, the length of this market uncertainty, volatility is ratcheted up a notch. Which already felt like through the first seven or eight weeks of the year, there was certainly much more volatility than we've experienced the last few years. Now you throw this powder keg on top of it and it certainly feels like a pretty big market moving event in the short term.
Benjamin Haas 03:06
Yeah, so broadly, I think our job now is to start to digest some of that for our clients and when questions come in, be able to speak directly to what do we think this means? And that's always going to be the question so I think for us today, you and I are both trying to be very well read on this. We probably have to give some historical context because I know that's how we choose to invest with our clients through that lens. We can certainly talk about some more shorter-term things that we think may happen but always with an eye to the future then on. Okay, what's the moral of the story? What do we want people to take away from this podcast? Because, look, this is a hard one. When we're talking about human lives, it's very different than us talking about inflation and things that feel now, so trivial to a really big geopolitical event. But let's lean on history a little bit here. I know that we can talk a little bit to prior wars, military events, let's just categorize them as market moving things because I know we've learned a lot from those in the last 80-90 years of data we can kind of draw from.
Adam Werner 04:32
Yeah, it was interesting to see. So we're with LPL and they put out a summary this morning just giving some of that historical context. And you look at that list of market driving headlines, especially like these types of conflicts and past wars, it really was eye opening to look at it through that lens. How did the market respond to Vietnam? How did it respond to the Iraq War? How did it respond to Afghanistan most recently and you can kind of put yourself back in those shoes at that time. I'm sure it felt way different in the moment but we have the power of hindsight, going back and knowing that, historically, the market has always recovered. It's just a matter of how long has it taken and so our outlook in that sense, is no different.
Benjamin Haas 05:31
Right.
Adam Werner 05:32
In this situation, the market will recover, it's just a matter of how prolonged is this going to be. What other, I guess dominoes are yet to fall as part of this but historically speaking, geopolitical events like this have averaged 5% or so draw downs and they've lasted three to four weeks. Then that recovery is typically again, we're talking averages, is roughly two months so another four to eight weeks. In the grand scheme of things relatively short lived. We don't know if that's going to be the case this time around but historically speaking, we expect to get to the other side of this at some point.
Benjamin Haas 06:14
Yeah, and I think we share that that has kind of given us, I would hope a little bit of reprieve with this. You feel a little bit better because it never feels worse than being like right in the moment. Most recently, for me, I just go back to the way that I felt going to bed every day as the market’s dropping, COVID-19 and waking up in the morning and just, you're looking at all this turmoil in the market, it never feels worse than that. And, you look three months out, where was the market, you look six months, nine months. This is war and it's so much more of a serious feeling for me. But yeah, history does show that if you can then look back a month later, three months later, and that's our job. Our job right now is to think, what does this mean for our clients 6-12 months from now. And as you shared with the statistics, the market typically does digest that and recorrect itself pretty quickly. What does that call for? Just a little patience right now which is hard.
Adam Werner 07:18
Yes, that it absolutely is. I was going to say we've often seen this happen and it's almost par for the course the way that the market digest that information and that it often overreacts to both degrees. Not only just volatility to the downside but then oftentimes, we see that exuberance on the upside may not necessarily be fully warranted at times, either. So it is that pendulum swinging a little bit too far in either direction is a natural consequence of investing in the stock and bond market. We're hoping at least in my thought that we're in that scenario here where it's reacting initially to just uncertainty. And we've talked about this in other podcasts, stock markets hate the idea of any type of uncertainty and especially when you're talking about now geopolitical event and conflict between countries. That uncertainty is huge so the fact that the markets are reacting the way that they are in the short term is not necessarily surprising. But I guess it's seeing how it plays out over the short term and I guess, again, we're looking through the lens of not necessarily short-term traders, but we're looking at it as l but we're looking at it as long-term investors. And really has our outlook necessarily shifted? The answer is no, it just puts us in a little bit deeper of a hole to kind of start this year out to get to where we think the markets are going to be at the end of the year, not necessarily the end of next week.
Benjamin Haas 08:53
And I think the contrarian can easily say, but this time may be different. We have no idea if this becomes a bigger, larger conflict and we're going to hopefully say things today that are going to ring true next week. If this invasion expands itself beyond Ukraine, who knows? But I think it is the important context to say how we will need to react to this, hopefully is no different than any other what feels like major event. If there was inaction during a COVID-19 time for some traders, they were rewarded for just being patient. We will hope this is a similar situation but let me, I know that you and I had a brief conversation on this this morning and I think it's important context too. Maybe more specific to Russia, is to think back to the last time there felt like there was War or conflict, did involve Russia in 2014. And I think the context of what happened since then is important for why we think this may not be a major market mover. Can I throw that to you to talk about the annexation of Crimea?
Adam Werner 10:16
We were talking about this earlier, and I love playing Jeopardy. I love trivia but I never in a million years would have been able to guess the year in which that occurred. But that's just the recency bias in my head and thinking that that was 2014. I thought it was way more recent than that so seeing that as the marker, here we are, whatever that is seven and a half, eight years later, was certainly a shock to me. But yes, there was certainly volatility around that time, clearly, it was just the uncertainty of what was going to happen. It was a lot of economic sanctions, again, on Russia and we should say that there's different lenses to view this through, clearly. We're coming at it from the eyes of US investors and the not just the US economy but our democracy. Europe has way closer ties to Russia, just geographically and they rely on Russia a lot more for their energy consumption so there is potential for more connection and more fallout from that sense.
Benjamin Haas 11:32
That's absolutely fair.
Adam Werner 11:33
I had another thought there and it just poof, it left.
Benjamin Haas 11:37
Well, then I'll pick it up from there. The point of 2014 is in a post cold war economy. The idea of being economically integrated was clearly to everyone's advantage that there would be some peace there. But 2014 already showed with the same Russian leadership that being that integrated was maybe not the way to go with a country like this. And we're now reading these reports that other economies, other countries have really wound back some of that integrated currency, integrated reserves and trade. Where what Russia is doing today and sanctions that may go against it may not affect, there may not be a lot of domino economically to other places. Other than, of course, this energy consumption.
Adam Werner 12:23
Yes. So yes, that is exactly where my mind was headed and then it got veered off course. Yes. It's the financial ties, the banking ties. One bank dealing with another bank across Europe, that has diminished greatly since 2014 when that did rear its ugly head because there was so much inner connectedness. So yes, where now the majority of that fallout will be coming, I think from the energy side of things, just because Europe relies on Russia for a fair amount of natural gas and oil imports.
Benjamin Haas 13:05
So I think that can tie back to, again, where do we stand today? And what can this mean to US investors? It really does mean that something like this, we don't anticipate putting us into some sort of recessionary period and we'd have to come at it from the backdrop that corporate earnings, I mean, here we are almost the end of February, everybody's all about reported. Corporate earnings were very strong again. We've proven time and time again coming out of COVID, that corporations have been able to adapt and if we don't have strong economic ties to this conflict, then I hope that historical context of the ability for the market return rings true this time around again.
Adam Werner 13:51
And we think a lot of this knee jerk volatility, is exactly that. It's just complete risk off. It's potentially throwing out the baby with the bathwater, right? That it doesn't matter. If it's a good stock or a bad stock, if it's a stock and you're fearful of what could potentially happen, you're selling that stock regardless because you want to go somewhere safer. That's often what happens in these very short periods of time where just that uncertainty really is taking the forefront where it's just to some degree, it's the indiscriminate selling across the board. It doesn't matter what you own and it's not cash and it's not guaranteed, then it's subject to that volatility.
Benjamin Haas 14:38
Yeah, and I know we promised not to go too granular so I'm going to say this and hopefully not take it too much further, but it does just mean, just as we've been, you're favoring US stocks over European stocks. It may mean that the growth stocks that have really been beaten up by potential interest rate increases. Maybe its growth overvalues now again, I don't want to get too granular but yes, still feel like tweaks if people really are feeling like they have to do something. They're not feeling like wholesale moves. Not for us.
Adam Werner 15:11
Right. And I'll go back to I think what I said earlier, maybe we just talked about it earlier, there are certainly opportunities for those short-term traders and environments like this. But that long term view, and especially for us and our clients coming into this event, we've had a pretty neutral approach to not just our stock allocation but our stock bond allocation was fairly neutral as well. So it does, we talked about this, it feels weird to have these market moving environments and just these headlines and the volatility that comes with it. You can go through all of this conversation, go through all of these different things happening and at the end of the day, you say, what would I change? What would we do at this point that would feel like you're making a bet one way or the other? And then that just philosophically is not how we go about things. We will certainly make tweaks here or there but yeah, making a wholesale change at this point, just in our eyes, doesn't feel like the prudent thing.
Benjamin Haas 16:27
And disclaimer, right? Of course, maybe, that will change. Subject to change but yeah, we are certainly following not only the historical context but all of the research and the information that we get from all our different investment partners. It's giving us I think, a little bit of comfort to just recognize that this is not a wonderful thing for the world right now. But does this become a lot of negative, how wide does that web get and does that have a lot of negative dominoes into financial markets? Maybe not and maybe that's just understanding that while Russia is huge and of course there is leadership there that I do not think feels like it's completely sane and able to be rationalized. They're the 11th largest when it comes to GDP? I don't know, I would have guessed they were maybe higher.
Adam Werner 17:24
Right.
Benjamin Haas 17:26
It just doesn't put them in a spot, I think of having this major impact on the rest of the world.
Adam Werner 17:32
Yeah. And it does. I mean, it does speak to just the inputs that drive the market in in short term bursts. I mean, it feels like somewhat of a novelty to feel like COVID has taken a backseat to pretty much everything else right now. Even before this specific Russia Ukraine deal, it was inflation.
Benjamin Haas 18:01
It was Fed interest rates.
Adam Werner 18:05
Yeah, well, it was what is the Federal Reserve going to do? What's inflation going to look like moving forward? Is the supply chain going to go work itself out? And just that kind of took over as the primary driver of market volatility and now you throw on top of that geopolitical event and it does feel strange that COVID is not a part of this conversation really, in any way, shape, or form, which I shouldn't feel good. But it clearly doesn't, for other reasons.
Benjamin Haas 18:40
Yeah, then I guess you brought up. We're talking about the Fed here a little bit. I guess that's the only thing that I would say, I'm kind of interested in the short term to see how it really shakes out because that is some of the headline and maybe that's even some of the trading that's going on today. We do think that a lot of the volatility was the Fed having to kind of adjust course. It needs to normalize rates and if inflation is really ratcheting up, then the Fed has come out and said, we're going to have to raise rates. Does this some sort of worldwide uncertainty now have them scale back how aggressive they may have been. That could happen and maybe the market sees that as the light but that would be short term, too, I think.
Adam Werner 19:27
Yes, that would definitely be the case if it certainly makes it way more difficult for the Federal Reserve at this point to now try to figure out what their policy is going to look like come March. This adds another wrinkle that I'm sure they were not necessarily thinking about but it is, if anything, it may delay some of the aggressiveness on the front end that I think was probably going to happen. But to really try to start to tame inflation, it's not going to stop it, it's not going to delay it indefinitely. It really is a few months down the road, at the end of the day, all of this again, putting this conflict in a box, it should not have the contagion to spread across all financial markets. I'm thinking like the global financial crisis 2008/2009 was a completely different scenario then we are dealing with right now so the end of the day, it really is, how will the US markets and how will the US economy be affected? It could be affected if energy prices continue to rise, we're all going to feel that in some way, shape, or form. Businesses are going to feel that. Margins may be
Benjamin Haas 20:51
No doubt.
Adam Werner 20:53
But GDP is still heading in the right direction, inflation is still high, that still needs to be dealt with on our shores. So while it may change that course a little bit for the Federal Reserve, it doesn't completely derail us. It's still going to happen. It's just a matter of, like everything, how long? What does that runway now look like? And hopefully getting to the other side of this conflict will give the Fed a clear path to now just deal with. I don't want to say the tangibles but the things that are under their purview. It's very hard to set policy based off of what another country is doing. You can't control that. You don't know how the markets going to react moving forward.
Benjamin Haas 21:45
I feel like that's got to be the moral of the story. We know that as long-term investors, we have to work our way through short term volatility and short terms relative, right? Who knows the dominoes have this type of conflict and where it can lead but we're long-term investors and we know the market is more forward looking than we tend to be. So the market felt a heck of a lot better about COVID than we did as human beings still going through shutdowns and isolation, pre-vaccines, all of that. The market was very forward looking at all that and that can happen again here so we don't want anybody to get on the wrong side of this because it feels bad right now. It's not great but, you know, got to hang in there.
Adam Werner 22:39
Yes, that was well said. Yeah, don't let the short-term volatility change your long-term plan.
Benjamin Haas 22:46
You got it. Alright. Thanks for your insights, as always,
Adam Werner 22:50
Thank you.
Benjamin Haas 22:52
Take care, see you soon. Bye.
Adam Werner 22:54
Bye.
Benjamin Haas 23:17
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening! Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.
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