An update on markets and the Russia-Ukraine conflict

Global stock and bond markets have experienced heightened volatility over the past few weeks as the world digests the changing economic and political landscape following Russia’s invasion of Ukraine.

Although the U.S. stock market’s response was at first muted, we experienced some additional declines as the potential of a more protracted conflict with broader economic implications has become a possibility. Even at the time of writing this, talks to reach a ceasefire continue, and the potential for de-escalation, while easy to discount given the headlines, remains.

Initially the expectation was that sanctions on Russia would exclude the energy sector. However, the list of sanctions has expanded, and last week the president announced that the U.S. would ban purchases of Russian oil and may also consider severing normal trade ties with Russia. Oil prices jumped on the announcement but have come back down after touching a high of $130 per barrel.

Maintaining perspective

Russia’s share of the total global capital markets is relatively small and has declined further since the beginning of the invasion. The Russian economy, as you can see from the chart on the left below, accounts for about 2-3% of the world economy and is a relatively small portion of total global trade.

Share of Russian Contribution Relative to the World

With that said, Russia is a large exporter of commodities — particularly natural gas, as the chart on the right-hand side shows. The impact of the current conflict has already been felt in commodity prices, and since the invasion, crude oil prices and wheat prices rose over 20% (though oil prices have pulled back recently).

One of the key concerns is the impact of the conflict on supply chains that were already challenged in the aftermath of the pandemic and the potential impact of higher input prices on corporate profits. It’s important to note, though, that the U.S. is largely self-sufficient when it comes to energy supply, and Russia accounts for just 3% of U.S. crude oil imports.1

U.S. economy remains strong

While geopolitics remain at the forefront of attention, the gears of the U.S. economy continue to churn. Despite the economic disruption wrought by the COVID-19 omicron variant, the job market showed strength, gaining 678,000 jobs in February, and wages remained flat — a glimmer of positivity on the inflation front. These positive trends were amplified by upward revisions for previous months’ numbers, too.2

Growth in consumer spending remains solid, as retail sales grew 0.3% in February, and January spending was revised upward to 4.9%, compared to a deceleration of -2.5% in December.

Given the central role of consumers in the economy, this strength bodes well for continued recovery.

Further evidence of economic strength was provided by the S&P 500 showing 31.2% earnings growth for the fourth quarter of 2021.3

Staying disciplined is key

The future is, of course, uncertain, and in times of heightened volatility, we often see markets pull back as investors’ appetite for risk declines. As concerning as these recent events are, we believe markets have the resiliency to recover from this shock. These are the times when it is most important to maintain discipline and avoid making rash changes to a long-term portfolio.

If you’re looking to diversify your portfolio so you can weather uncertain times, learn about Wipfli Financial Advisors and how we can help.

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Rafia Hasan

CFA, CFP® | Principal, Chief Investment Officer

Rafia Hasan, CFA, CFP®, is the Principal and Chief Investment Officer for Wipfli Financial Advisors, based in Chicago, IL. Rafia leads Wipfli Financial's Investment Committee and has a deep knowledge of the financial markets, specifically in the areas of alternative investments and private equity. She also specializes in personal financial planning and estate planning for women investors.

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An update on markets and the Russia-Ukraine conflict

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