How does instability in Ukraine affect the financial markets?
We had a client ask us recently why the financial markets are affected by events in Ukraine. There are three main reasons.
First, financial markets become volatile at the least sign of uncertainty. Uncertainty is brought about by the Ukraine situation because countries are scrambling with actions they will take against Russia and how they might support Ukraine. Those actions will have geopolitical and financial consequences.
Second, many countries trade with Russia. If they cease trading with Russia, who will be their trading partners and how will that affect the costs of those goods and services. The best example is the purchase of oil and natural gas by Germany from Russia. Germany imports 35% of its oil, 55% of its natural gas, and 50% of its coal from Russia.
Third, is related to the energy that Russia exports. Russia is also a net exporter of wheat and grain. If Russia reduces exports voluntarily or due to sanctions, inflation could become more of a problem due to increased costs of energy, wheat, and grain. When inflation rises there are fewer dollars to purchase other goods and services which will adversely affect companies’ stock values.
The Ukraine conflict comes on the heels of a significant market run over the last three years. The S&P 500 was up 31.49% in 2019, 18.40% in 2020, and 26.89% in 2021. The Ukraine conflict has certainly increased volatility and you can expect to see negative returns in the short-term, but as recent history just demonstrated with COVID, staying the course in a diversified portfolio based on your risk tolerance, time horizon, and goals will ultimately be the key to success.
AP Wealth views events like this as an opportunity. It is an opportunity to invest idle cash at lower prices, buying low is always a great strategy. If you have the cash to invest, please call us to discuss. It is an opportunity to confirm your risk tolerance. If you start to panic during a market downturn, your portfolio may be too aggressive. We encourage you to reach out to one of our team members if you have feelings of anxiety or concern about the market.
Please do not hesitate to reach out directly to our team if you have questions.