Despite Human Toll, Markets Discount War

The Russian invasion of Ukraine has already claimed hundreds of innocent lives and now threatens to displace millions and spark a humanitarian crisis in Eastern Europe.

Having priced in an attack and economic sanctions but not a full-scale invasion, investment markets reacted rationally on Thursday as events unfolded: Stocks sank, gold rose and oil prices skyrocketed.

Yet as the day wore on, investors appeared mollified by news that the U.S. and its NATO allies would delay imposing sanctions that could cause severe economic blowback. Buying was also buoyed by expectations that the Federal Reserve’s plan to hike interest rates would be slowed. The stock market’s turnaround was stunning: After sinking 850 points, the Dow Jones Industrial Average rebounded to close up 92 points; the tech-heavy NASDAQ Composite upended a 3.5% loss and a brief sway into bear market territory to log a 3.3% gain.

The Ukraine war may well mark a new epoch for Europe and the world, but less than 48 hours in, it’s too soon to be certain about its enduring ramifications—though it’s safe to say that Vladimir Putin’s reputation as a thug and a warmonger is now cemented in history. For investors, volatility will surely be ongoing for stocks, bonds and commodities. But this is something we’ve been predicting for some time now given the historically calm markets of recent years.

One thing you can be sure to expect: A notable uptick in prophecies, predictions and all-out bloviation from pundits and analysts competing for airtime and trending hashtags.

Regardless of the noise, and in concert with our ongoing concern for the people of Ukraine, you can expect us to remain steady stewards of your investment capital.

As long-term investors, we’ll keep our eyes focused on the fundamentals, which, in our view, are strong. Stocks are an elegant and time-tested vehicle for investing in companies that provide the products and services that people around the globe need. Those demands won’t end based on Putin’s ignoble actions. And the price swings and knee-jerk reactions we’re likely to see from traders in coming weeks? Well, they are precisely what create opportunities for investors and portfolio managers.

Energy Hangs in the Balance

European bourses faced single-digit losses on Thursday, while Russia’s MOEX stock index plunged 33% (at one point it was down 50% before rebounding off the bottom).

That the Russian market should be impacted by a war of its own making is obvious. Russia has the world’s ninth-largest population but only the 11th-largest economy. And the strength of its economic ties around the globe is based on a single line of business—energy. Oil and gas represent 50% to 60% of its exports, generating 15% of Russian GDP and 36% of its government revenues. Therein lies a large dose of uncertainty.

While Russia’s economy will feel the pain from the war in Ukraine, costly disruptions in the global energy supply, abetted by sanctions of a yet undetermined scope, will be felt well beyond Russia’s borders.

Russia fulfills more than a quarter of the EU’s demand for oil and provides 40% of its natural gas. Europeans were already feeling the pinch of higher energy prices this winter, with shortages doing their part to push eurozone inflation to a record 5.1% annualized rate in January. With crude prices spiking to over $100 a barrel, many eyes are turning to the U.S. to ease the situation. Expect to hear more about liquefied natural gas exports to the EU and, yes, steadily higher prices at the pump.

Fed Tangled in Russian Knot

The possibility of ’70s-style stagflation—when high inflation and slow growth occur simultaneously—is one of the specters haunting Fed Chair Jerome Powell and his central bank peers around the globe.

Even so, it seems likely that the Fed will go ahead and begin to raise interest rates at its March meeting. The central bank has been signaling for weeks that a hike is imminent and is likely reluctant to sow confusion with an abrupt policy shift. But it may rethink its plans for a simple, stair-step rate-hike approach to taming inflation. Next month’s rate increase is more likely to be a 0.25% uptick rather than the stiffer 0.5% jump that inflation hawks have been pushing for. (A report from CME Group based on futures pricing now put the odds of a 0.5% hike at 9%, compared with a 34% chance Wednesday.)

The bigger question is whether the Fed can stick to its goal of achieving 2% inflation overall by year-end. Commodities like oil and gas aren’t counted as part of “core inflation,” the Fed’s preferred yardstick, precisely because their prices are so volatile. Pain at the pump in the U.S. and shivering European homeowners had spurred a shift in central bankers’ willingness to tackle inflation pressures head-on. But raising interest rates in a slowing economy could be the wrong medicine: Reports suggest that recent jumps in mortgage rates may soon cool the red-hot housing market.

We wouldn’t want to be in Powell’s shoes right now; he has some tough calls to make. But if his decisive action during the pandemic is any indication, he will use the tools at his disposal to help disentangle our economy before a Russian knot takes hold.

Chart of the Week: Is Global Strife a Signal to Sell?

By Director of Research Jeff DeMaso

As gut-wrenching as it is, this is not the first time in history that war has broken out in Europe. Is a major geopolitical crisis always a sell signal?

To help answer this question and provide some context, I hit the history books and marked the onset of military conflicts (or near conflicts). Then I measured the performance of the Dow Jones Industrial Average over the ensuing months. (The Dow is only 30 stocks and doesn’t include dividends, but it’s the longest-running “live” index we have.) What I found was that, on average, stocks were 7% higher six months after the start of a conflict.

It’s certainly possible stocks could decline further—nothing is guaranteed—but six months isn’t exactly a long time to be rewarded for your patience.

Podcast: Retirement Spending Rules of the Road

When it comes to retirement planning, there is no shortage of tips, tricks and “top 5” lists meant to help you decide whether you’re ready. But which ones have a grain of truth and which can you safely ignore? In this episode, crack financial planners Andrew Busa and Diana Linn talk through popular retirement planning advice to help you prioritize what’s really important, including:

• Rethinking expenses when your lifestyle changes
• Whether the “4% rule” still makes sense
• How the “bucket approach” can help you wrap your mind around investment risk

Deciding when to retire is one of the most important decisions you can make. Listen now to let Andrew and Diana help you feel confident about your choice.

Financial Planning Friday
Early Retirement Playbook, Part 2: Health Care

Continuing your health coverage can be a snap if you retire from full-time work after you hit age 65—simply switch from your employer-based plan to Medicare. (For details, check out our podcast on Medicare planning.) But how do you handle health insurance if you want to retire earlier?

Here are five options to consider:

1. COBRA. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows you and your dependents to maintain health coverage under your employer’s plan for up to 18 months after you retire. The pitfall is that employers generally pay a large portion of the premium while you’re working; under COBRA, the entire expense will fall on your shoulders. And prices can be steep, especially if you have underlying conditions. Find out in advance what your employer pays so you can budget for the expense.
2. Health Care Exchange. If the 18-month COBRA window doesn’t bridge the gap to Medicare, securing coverage through the insurance exchange at healthcare.gov is another option. When COBRA expires, you are granted a 60-day enrollment period when you cannot be denied coverage on the insurance exchange based on preexisting conditions. Some states, such as Massachusetts, offer their own exchange for health care plans. But both paths are expensive. If you expect to use the health care exchange, check healthcare.gov preemptively to shop for a suitable plan.
3. Spousal Coverage. If you plan to retire sooner than your spouse, find out if you’re eligible to be included as part of a family plan through their employer. This can be a handy and cost-effective way to maintain health coverage before your Medicare eligibility without purchasing an individual plan on the insurance exchange.
4. Part-Time Work. Many retirees decide to take up part-time work after leaving their full-time careers. If you think this is a possibility for you, check what health benefits may come through your part-time employer.
5. Employer’s Retirement Package. While this avenue is far less common today than in the past, it is possible you may be eligible for health benefits in retirement through a past employer or union. (Teachers, civil servants and veterans sometimes receive benefits depending on the circumstances of their employment.) If this is something you may qualify for, make inquiries with your current and past employers.

Health coverage is essential, but it can put a dent in your retirement budget. We’re here to help. If this is something you’re considering, make it an agenda item for your next meeting with your wealth management and financial planning team.

Ask Us a Question!

We’re always interested in the topics or themes you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser Investments in the Media

Yesterday, Chief Investment Officer Jim Lowell and Director of Research Jeff DeMaso recorded a brief video offering our initial assessment of the Ukraine crisis’ impact on markets.

In addition, Jim appeared on Fox Business Thursday to discuss Wall Street’s reaction to the invasion, while Adam Johnson appeared on the network earlier in the week to discuss both Putin’s and Jerome Powell’s power to command traders’ attention.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed why U.S. regulators are finally taking crypto seriously, while Vice President Portfolio Manager Steve Johnson offered his thoughts on how to focus on fundamentals despite the harrowing headlines.

Looking Ahead

We have no doubt events in Europe will continue to dominate global news in the coming weeks; the backward-looking economic reports on the state of the economy may have less resonance than usual. Still, next week we’ll see reports on the manufacturing and service sectors, construction spending, productivity, factory orders, the Fed’s “Beige Book” of anecdotal reports from around the country, and the February unemployment rate.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. As the events in Ukraine continue to unfold, please do not hesitate to call us if you are feeling concerned about your portfolio or financial plan, or if you simply want to talk. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.