While financial markets have already been navigating around high inflation and the potential for rising interest rates, we are now seeing one of the most significant geopolitical conflicts and humanitarian crises of our time. The tragic and awful events occurring in Ukraine are also roiling financial markets, providing more uncertainty and volatility than we have seen in many months (even years). From that perspective, and putting ourselves in the mindsets of our clients, we take a close look at answering three key questions for this month’s commentary: (1) how may this impact the US economy, (2) what does this mean for you as investors, and (3) how can you protect your portfolio?
How may this impact our economy?
Mainly energy. Approximately 8% of US imports of oil and refined products (equivalent to ~670k barrels per day) comes from Russia. Most of our energy imports come from Canada (~51%) followed by Mexico (8%) and then Saudi Arabia (5%). Even before the Ukraine-Russia conflict, we were seeing $100+ per barrel of oil. Now we are seeing this number exceed $115-120 a barrel, and prices could continue on the upswing as the US recently decided to ban Russian oil imports. Even though 8% of imports does not seem significant, this would still lower the supply of oil, thereby increasing the price per barrel (and what you pay at the pump) even further. Of course, beyond higher energy prices, the mere fact that there is a geopolitical conflict on top of already high inflation could hamper overall US economic activity. On the bright side, it is worth noting that we have seen very positive economic news lately when it comes to jobs and the consumer, which point to strong economic fundamentals despite recent headwinds. February nonfarm payrolls rose by 678,000, which was much higher than the expected reading of 440,000, and the unemployment rate fell to 3.8%. Consumer spending increased 2.1% in January, even in the face of higher inflation. It will likely be overseas, particularly European countries and certain Emerging Markets, where we see more of a negative impact to economic productivity and growth.
What does this mean for me as an investor?
Given that Russia has been shunned from the global economic engine, there will likely be reverberating impacts to pay attention to as an investor. While the US does not have a strong reliance on Russian energy imports, what about European countries that do depend on them significantly? In 2019, Russia crude oil accounted for 27% of imports while Russian natural gas accounted for 41% of imports. Also, many publicly traded companies have pulled out of Russia entirely. What does this mean for expected corporate profits moving forward? Every company is different in terms of their overall exposure to Russia and how much of their profits come from Russian consumers that will no longer be there. Additionally, what does all of this mean for globalization and the future of the preexisting global economic structure? Russia is in the spotlight now, but the world is also watching what this means for China and other similar countries that have been sympathizers of Russia. As investors, it will be important to assess and navigate through these potential changes that could occur as a result of the conflict.
And finally, the other key consideration as an investor is volatility. As the conflict continues, we will likely see more volatile trading and sharper “ups-and-downs” than usual due to the uncertainty around the war. The world does not yet know the true extent of the damage and/or how long it will last, so all of these unknowns tend to create a nervous stock market. As an investor, it is difficult to see this even if you are mentally prepared, but this is why it is important to have a portfolio strategy that is thoughtful, well-diversified, and still focused on your long-term aspirations.
How do we protect our portfolio?
While many news articles or TV analysts would suggest that there are one or two “silver bullet” investments to protect in these types of environments, we would respectfully disagree. Instead, it has been proven time and time again that it takes a “team effort” (i.e., a group of multiple asset classes that complement one another) to provide an appropriate level of downside protection, while still allowing for the opportunity for long-term growth. In other words, having a well-diversified strategy that is aligned with your long-term personal goals is the best approach as it provides “built-in” protections for these volatile times. The below chart is one example that illustrates the value of a diversified portfolio over the long haul. This chart shows how the MSCI All Country World Index, S&P 500, and a sample diversified 60/40 portfolio have fared over the last 30 years. The red dotted lines plotted on the chart indicate the approximate timeframe that a major market-moving event occurred (i.e., Kosovo War, dot-com bubble, 2008 financial crisis, COVID 2020, etc.). While the market did fall sharply in the short-term, you can see that the diversified portfolio was less volatile yet still provided a strong, annualized return of 7.36% per year. During these times, the diversified portfolio also fell less and recovered more quickly than the major equity indexes, creating a less bumpy ride for investors.
Getting through a major market-moving event is scary and never easy, no matter how well you prepare yourself. However, having a disciplined, well-diversified portfolio management approach (and a dedicated advisor!) can really make the difference, helping you stay on track for the long haul and get you through the rough waters in the short-term.
Stock Market vs Sample 60 40 Diversified Portfolio ChartSources: YCharts, Sanctuary CIO Corner, Wall Street Journal https://www.wsj.com/articles/why-does-the-u-s-still-buy-russian-oil-11646151935, https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-2c.html#carouselControls?lang=en
Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.
The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice. This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Investments are subject to risk, including but not limited to market and interest rate fluctuations. Any performance data represents past performance which is no guarantee of future results. Prices/yields/figures mentioned herein are as of the date noted unless indicated otherwise. All figures subject to market fluctuation and change. Additional information available upon request. The “Sample Diversified Portfolio (60/40 Allocation) is comprised of the following total return indices and allocations: 40% S&P 500, 3% S&P 400, 4% S&P 600, 15% MSCI EAFE, 5% MSCI Emerging Markets, 40% Bloomberg US Aggregate Bond.