Geopolitical tensions add to near-term uncertainty, but a favorable long-term view still intact

1-Day | 1-Year | |
---|---|---|
TSX | -0.9% | 11% |
S&P 500 | -0.70% | 7% |
Gov't Bonds | 0.41% | -6% |
10-yr Rate | -4.4 bps | 58 bps |
Source: Bloomberg. FactSet. Past performance does not guarantee future results. Market indexes are unmanaged and cannot be invested into directly.
This chart shows the recent run-up in the markets volatility index as stocks have sold off on the Russian crisis.
Stock Market Performance
Event | Date | 1 Day | 3 months | 1 year |
---|---|---|---|---|
Saudi oil pipeline drone attack | 9/14/2019 | 0.0% | 5.4% | 12.5% |
Russian annexation of Crimea | 2/20/2014 | 0.6% | 2.4% | 15.4% |
Boston Marathon bombing | 4/15/2013 | -2.3% | 5.9% | 16.0% |
Iraq invades Kuwait | 8/2/1990 | -1.1% | -12.3% | 8.9% |
Kennedy Assassination | 11/22/1963 | -2.8% | 8.4% | 20.5% |
Cuban Missle Crisis | 10/16/1962 | -0.3% | 12.9% | 27.4% |
Source: FactSet, past performance is not a guarantee for future returns. The S&P 500 is an unmanaged index and cannot be invested in directly. |
This table shows the immediate, 3-month, and 1-year price action in the S&P 500 after similar shocks to the market. The general trend is that the market moves higher over the long-term.
Our broader take: Markets can climb these walls of worry. The rising geopolitical tensions are certainly a headwind for markets in the near-term, and they come at a time when investors were already grappling with uncertainty around inflation and Fed rate-hike expectations. Higher oil prices and potential supply-chain disruptions also weigh on inflation and consumer confidence. However, markets have now fallen well into correction territory, with the S&P 500 down over 10% from recent highs, perhaps now reflecting some of these headwinds. More broadly, the S&P 500 is still up nearly 80% from the March 2020 lows1, perhaps just now giving back some of the excess valuation expansion in the post-pandemic period.
Taking a step back, we continue to see a U.S. economy that remains in the later mid-cycle of its economic expansion. This is supported by a relatively healthy consumer, above-trend economic growth, and robust corporate balance sheets and earnings growth. While we will be watching the impacts to inflation and confidence, it is notable that the direct economic impact from Russia to the U.S. is also relatively limited, as Russia accounts for just 1% of U.S. revenues and is a minor trading partner for the U.S. (European economies have notably more exposure).
While markets are facing sizable walls of worry – both with rising geopolitical tensions and a Fed that will lay out its tightening policy in mid-March – we see the potential for stability in the weeks ahead as we get more clarity on both fronts. Although defensive posturing makes sense in the near term, in our view market opportunities may be forming, particularly if economic and earnings growth continue to hold up well. While volatility was expected this year, investors can use these periods as opportunities to re-balance, diversify and ultimately add quality investments to portfolios at attractive prices and valuations.
Mona Mahajan is responsible for developing and communicating the firm's macro-economic and financial market views. Her background includes equity and fixed income analysis, global investment strategy and portfolio management.
She regularly appears on CNBC, Bloomberg TV, The Wall Street Journal and Barron's.
Mona has an MBA from Harvard Business School and bachelor's degrees in finance and computer science from the Wharton School and the School of Engineering at the University of Pennsylvania.
Craig Fehr is a principal and the leader of investment strategy for Edward Jones. Craig is responsible for analyzing and interpreting economic trends and market conditions, along with constructing investment strategies and asset allocation guidance designed to help investors reach their financial goals.
He has been featured in Barron’s, The Wall Street Journal, the Financial Times, SmartMoney magazine, MarketWatch, the Financial Post, Yahoo! Finance, Bloomberg News, Reuters, CNBC and Investment Executive TV.
Craig holds a master's degree in finance from Harvard University, an MBA with an emphasis in economics from Saint Louis University and a graduate certificate in economics from Harvard.
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