Greenville, South Carolina, 16th March 2022, ZEXPRWIRE, While market sell-offs from geopolitical events happen quickly, based on history, they don’t tend to last that long. The market reaction to geopolitics may fade, but the interest rate environment remains a key consideration for investors and could continue to drive volatility in 2022. Events such as these serve as a reminder of the importance of diversification in your portfolio.  

MARKET RETURNS AS OF FEBRUARY 28, 20221

Index return  February (%)  YTD (%)  1 Year (%)  3 Year (%)  5 Year (%)  10 Year (%)
S&P 500 TR  -3.0  -8.0  16.4  18.2  15.2  14.6
DJ Industrial Average TR  -3.3  -6.4  11.6  11.7  12.7  12.7
NASDAQ Composite TR  -3.3  -12.0  4.9  23.2  19.9  17.9
Russell 2000 TR  1.1  -8.7  -6.0  10.5  9.5  11.2
MSCI EM GR  -3.0  -4.8  -10.4  6.4  7.4  3.6
MSCI EAFE GR  -1.8  -6.5  3.3  8.3  7.7  6.6
Bloomberg US Agg Bond TR  -1.1  -3.2  -2.6  3.3  2.7  2.5

The first half of the month was defined by a focus on rising inflation. Most of our wallets had already felt the effects  of rising prices when data on February 10 confirmed that inflation hit a 40-year high in January at a 7.5% annual  rate, while the 10-year US Treasury hit 2%.2 

The next day, geopolitical risks heated up – quickly – and on February 11 the U.S. warned that Russia could invade  Ukraine at any time. Since then, Russia did indeed initiate an invasion and stock markets have underperformed  safe havens and commodities.  

  • When it comes to stock markets, the exposure to Russia and Ukraine is quite small. In fact, the S&P  500 has less than 0.1% direct sales exposure to Russia.3 However, Russia is a large producer of key  commodities, which means these events and global sanctions may feed into inflation.  

Guessing how long this volatility lasts is a fool’s game, but the market impact will fade. The chart below shows  some of the largest impact geopolitical events over the past 50 years. The market decline is usually anywhere  from 2 to 27 days in duration, and most of the time (but not always) the duration to recover was also relatively fast.  

HISTORICAL VOLATILITY AROUND GEOPOLITICAL EVENTS4

Event  Start of 

Sell Off

Duration of Sell Off  (Trading Days) Duration to Recover to Prior  Level (Trading Days) Size of 

Sell Off

Israel Arab War / Oil Embargo  29 Oct 1973  27  1475  -17.1%
Shah of Iran Exiled  26 Jan 1979  34  -4.6%
Iranian Hostage Crisis  5 Oct 1979  24  51  -10.2%
Soviet Invasion of Afghanistan  17 Dec 1979  12  -3.8%
Libya Bombing  21 Apr 1986  20  -4.9%
First Gulf War  1 Jan 1991  -5.7%
Kosovo Bombing  18 Mar 1999  -4.1%
9/11 Attacks  10 Sep 2001  15  -11.6%
Iraq War  21 Mar 2003  16  -5.3%
Arab Spring (Egypt)  27 Jan 2011  -1.8%
Ukraine Conflict  7 Mar 2014  13  -2.0%
Intervention in Syria  18 Sep 2014  21  12  -7.4%
Average  1973-2014  12  137  -6.5%

THE FED 

The next Fed meeting is March 16. The closer we get to that date, the more the debate around what to expect for  2022 will come to the forefront. How aggressive will the Fed need to get to fight inflation? How many rate hikes do  economists and investors expect? Will future hikes be 25bps or 50bps?  

As we’ve discussed before, the beginning of rate hiking cycles are not always bad for stocks, but the key is whether  the Fed will succeed in engineering a policy transition that will not cause a recession.  

WHAT’S NEXT?  

If nothing else, events such as these serve as a reminder of the importance of diversification in your portfolio. Some considerations in this environment:  

  • While it’s hard to see it when stock markets are going up, core bonds and real assets can act as diversifiers to  stocks when they aren’t.  
  • Coming out of this event, ensuring a quicker energy transition may become more important, so look out for  potential thematic opportunities in renewable energy.  
  • Although markets are choppy, keep your eye on the horizon (and the Fed), stay patient and ensure your  portfolio is positioned for a rising rate environment.  

These are just ideas, not recommendations, and whether they make sense will depend on an individual’s personal circumstances.  

If you have questions on your portfolio positioning, or have any changes to your goals, risk tolerance, or time horizon,  please reach out to schedule a conversation. 

  1. Morningstar. Returns over one year are annualized.
  2. https://www.wsj.com/articles/us-inflation-consumer-price-index-january-2022-11644452274
  3. Global X. February 25, 2022. https://www.globalxetfs.com/russias-invasion-of-ukraine/
  4. J.P. Morgan Asset Management, Deutsche Bank, Refinitiv Datastream, Standard & Poor’s. Data as of 2/21/2022.

Returns shown are total returns of indices. Returns over one year are annualized. Past performance is no guarantee of future returns.  

This material has been prepared for information and educational purposes and should not be construed as a solicitation for the purchase or sell of any investment. The  content is developed from sources believed to be reliable. This information is not intended to be investment, legal or tax advice. Investing involves risk, including the loss  of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values. Investment advisory services offered by duly registered  individuals on behalf of ChangePath, LLC a Registered Investment Adviser.

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