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Ukraine: A Framework For Assessment

Posted on Wednesday, February 02, 2022

"How a Russian invasion of Ukraine could trigger market shock waves!" Headlines are designed to create angst, so you’ll take the click-bait, and dive down the advertisement rabbit hole. Yes, a potential invasion is concerning, so it’s important to consider the possibility with full context. Unfortunately, "Russian aggression in the Ukraine is possible, but unlikely to develop into a full-blown continental conflict" just doesn’t have the same urgency as the original version. Regardless, the persistent drumbeat of geopolitical news warrants an assessment of the potential crisis in Ukraine, a framework for considering additional news as it unfolds, and a reinforcement of the discipline required to execute your family’s financial plan.

Let’s start with a brief assessment of the risk of ground conflict occurring, and more importantly, expanding beyond Ukraine. Global initiatives, NATO, and the Marshall Plan were designed to maintain order, so that nations and their citizens may live in peace. Most experts agree that Putin’s primary goals of a Ukraine invasion are pushing the United States out of Europe, dismantling NATO, and ensuring that countries surrounding Russia are aligned with, or controlled by, the Kremlin. Given these goals, we do not see it in Russia’s interest to launch a prolonged ground invasion in Ukraine, and especially not to broaden efforts beyond its borders. Some European nations have already revealed that they will not intervene if Russia were to enter Ukraine, but further geographical disruption would likely not be tolerated. The United States in particular is likely to build presence in Europe in this situation rather than backing away. The far more likely outcome is expanded conflict in the information, cyber, and space domains. It’s easy for Russia to act with these types of aggression without direct attribution. The movement of tanks, planes, railcars, and troops are highly visible to the public and press—no plausible deniability.

While a conflict in Europe is concerning on its own, there is also the possibility of other unfriendly or unstable nations to opportunistically use the diversion for their own ill intentions. Iran, North Korea, or China are all potential actors in this scenario, although we believe this risk is also low. With the Olympics on full view in China, the country would likely want to avoid any actions counter to the global goodwill they are trying to build. Further, China is still in the midst of modernizing their military, so seeking geographic gains would be premature. Iran and North Korea could always make some noise, but this is the case on any day, and the significance would be low if anything occurred.

We believe the potential for the long-term and most significant risk would evolve from unchecked aggression. There are always short-term political risks, but mismanagement of conflict could have the effect of casting the United States as a declining global force and an unreliable partner. This scenario opens the door for China to position itself as a replacement in the global arena, which is a broader risk worthy of future updates.

For now, the world is watching to see what Putin will do in the coming days. Polls show that Russians under 40 oppose a costly ground war. There is also the viewpoint that Putin has already scored some points because he is sitting at the table with the United States and NATO, legitimizing his concerns. There are many reasons we believe the risk of a ground conflict beyond Ukraine is low, but the reality is we don’t know what will happen. Unfortunately, living with geopolitical risk is part of the landscape for all investors. Volatility is always expected in the markets—without risk, we cannot expect a return. Remember that the U.S. stock market, represented by the S&P 500®, sees a pullback (defined as a drop of 10% or more) each year, on average. We never know if the cause will be a pandemic or a potential ground invasion, but January 2022 is not an outlier. So, don’t let what Vladimir Putin does or doesn’t do derail your plan. The opportunity risk of guessing is far too high.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Index Disclosures:
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

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