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Geopolitical Market Review- Ukraine invaded by Russia

The markets continue to experience turbulence as Ukraine defends itself from Russia’s invasion. Heightened geopolitical risks on top of the anticipated unwinding of the Fed’s bond purchases and rate increases have pushed the volatility index known as the VIX to 29.47, which is down from the 12-month high of 31.96 on 1-26-22, but still higher than its long-term average.


With the new development in Russia and Ukraine, the market is already indecisive of the anticipated Fed actions. This is evidence by a decline in the projected number of rate hikes later this year. The war kind of accomplishes the same effect as raising rates. Therefore, the Fed may need to reconsider or adjust its current strategy. Rates may start to come down if there is a flight to quality and safety provided by bonds. It is supply and demand that can drive bond prices up. And when bond prices go up, rates go down.

Overall, our position remains that the first part of 2022 will be more volatile than the second half of 2022 and that risk on assets end the year positive. Our view is supported by the options markets where the probability of investors maintaining risk on asset while hedging risk temporarily is high. For investors who have investment time horizons beyond six months, we believe it is prudent to maintain their positions. Moreover, history has provided evidence that continued headline-driven volatility will likely present opportunities to buy stocks at favorable prices. The general pattern is for the markets to sell-off on the news and to rise as the event stabilizes.

As illustrated by the chart below, stocks bottom just before invasion.


Graph RussiaUkraine


As we have been discussing over the last several weeks, the tug of war between managing risk and managing inflation will continue and has become more complicated with the invasion of Ukraine. We will continue to reposition portfolios as new data presents itself and we will continue to hedge our portfolio within each portfolios mandate. A combination of equities, cash, and dynamic asset allocation may play a nice complement to a sound financial plan where clients can establish comfortable level cash, and risk off assets like annuities and structured notes. The overarching goal when we construct portfolios is to optimize risk-adjusted returns and minimize downside risk; however, we are not immune from volatility as we maintain risk on assets and attempt to hedge risk. So, although we are going through a storm, we believe the storm will pass and that well-built portfolios, and fundamentally strong companies like Apple and Microsoft have a higher probability of being higher in the futures rather than lower.

We continue to pray for the peoples of Ukraine and Russia, and we pray that our investors will stay emotionally strong and will not let short-term volatility overshadow longer-term investing principles.


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Information contained herein is based on data obtained from sources believed to be reliable, however, such information has not been verified by Carlton Financial Group, LLC d/b/a Carlton Wealth or Synergy Financial Management, LLC. The information provided has been prepared and distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy or an offer of advisory services.

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