Hard times (hope inside)
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Some perspective on the grim situation in Ukraine and what could happen in markets.
(Need a break from it? Scroll down to the P.S.)
The invasion of Ukraine is a serious and scary escalation in tensions between Russia, Europe, and the United States.
Before we dive in to what it could mean, let’s take a moment to think about the many folks who are suffering and dying as well as the ordinary Russians who will suffer from sanctions, instability, and economic damage.
We hope and pray that diplomacy can end this crisis for all our sakes.
Let’s talk about some possible implications for markets and our economy.
Given Ukraine’s critical pipelines and Western sanctions on Russia, the crisis may lead to higher energy prices, which will trickle down to higher pump and heating fuel costs.1
Sustained price increases could hamper the Federal Reserve’s effort to control inflation, so we’re keeping an eye on that as well.
What could happen in markets?
Extreme volatility, as we’ve already experienced, is very likely. Another correction (or even a bear market) is definitely possible.
What does history teach us about market reactions to geopolitical shocks?
History shows that stocks usually recover quickly from geopolitical crises.
We’ll add a disclaimer that the future doesn’t perfectly match the past — but it often rhymes.
Let’s take a look at some examples from other invasions and wars.2
Here’s the key takeaway: short-term, markets usually react badly. However, a year later, markets have historically recovered.
Will they always? In every case? That’s impossible to say.
But, the study of 29 geopolitical events since WWII shows a general trend toward short-term losses in the first weeks and longer-term gains over months.2
A note: “geopolitical event” is a very antiseptic phrase for horrible things like bombings, wars, invasions, attacks, and really fails to encompass the full cost in human misery.
Let’s never forget the truth behind the numbers.
We can’t know or control what happens next. We can hope, pray, donate, and speak out.
And we can focus on what’s in our control: Ourselves, our actions and reactions, and our strategies for uncertain times.
Let’s hug the people we love extra tightly today and be very grateful for our blessings.
Be well,
Dr. Chris & the NorthStar Team
P.S. Tired of war and bad news? Need a break? We’ve got two TED talks for you:
1) A dive into research that shows how our brains might be wired for optimism
2) How to forge meaning from challenging moments.
P.P.S. Looking for ways to donate to Ukrainians? Here’s a roundup of some organizations doing good work.
1 – https://www.nytimes.com/2022/02/27/business/oil-prices-russia-ukraine.html
2 – https://www.reuters.com/markets/asia/live-markets-what-history-says-about-geopolitics-market-2022-02-18/
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As we consider the tensions driving recent market movements, a Korean folk saying seems apt:
“When whales fight, the shrimp’s back is broken.”
The idea is that bystanders get hurt when big folks duke it out.
What are the tensions? Who are the bystanders?
Let’s discuss.
An invasion of Ukraine may occur in the coming days or weeks.
Or it might not. It’s really impossible to say.
The U.S. has closed the embassy in Kyiv and warned of a dramatic buildup of Russian forces on the border with Ukraine.1
It’s unclear whether Russia is willing to diplomatically resolve security concerns about Ukraine joining NATO.2
However, a ground war between NATO and Russia would be extremely damaging, so it seems (hopefully) unlikely that Russian troops would actually invade.
Then again, they might.
That seesaw between high tension and relief is likely to add a lot of volatility to markets as investors digest the latest news.
The Federal Reserve may aggressively raise interest rates to fight inflation.3
With inflation at historic highs, some Fed officials worry that the central bank’s credibility — AKA, their ability to manage inflation and employment — is on the line.
Rate hikes are coming in 2022, but how many and how quickly? That’s up for debate by the Federal Open Market Committee next month.
Fed “hawks” want to raise rates quickly to try to bring inflation under control and increase consumer confidence and trust.
Fed “doves” want to carefully raise rates and watch the data to avoid damaging growth or spooking markets.
These are big decisions with big consequences for us, the economy, and markets.
While FOMC meetings are often dry affairs, the next one looks to have as much drama as an episode of Succession.
We’ll stay tuned.
Bottom line: there are a lot of factors driving market movements, so we can expect to see plenty of volatility in the weeks to come.
Given the Fed and geopolitical tensions at play, a pullback or correction would not be surprising, either.
What can we do when we’re facing major events we can’t control?
Take a deep breath, be grateful for all the good in our lives, and focus on our strategy.
(And email us with questions or concerns.)
Let’s hope for peace and clarity in the weeks to come.
We’re keeping a close watch and will reach out as needed.
Be well,
Your NorthStar Team
P.S. Looking for a mental break? Here’s an interesting TEDx talk on “The Science and Power of Hope.” It’s given by Dr. Chan Hellman, whose research focuses on the psychological power of hope to overcome adversity and create change.
Let us know what you think!
1https://www.cnbc.com/2022/02/13/stock-market-futures-open-to-close-news.html
2https://www.bbc.com/news/world-europe-60379833
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