With tensions between the United States and Russia running as hot as January’s Consumer Price Index reading, many investors are wondering if it’s time to reduce risk in their portfolios amid fear of a new war.
At least from a historical perspective, exiting the market would be the wrong move.
The S&P 500 was higher 12 months later in nine of 12 geopolitical shock events analyzed in a new note (seen below) by Truist co-chief investment officer Keith Lerner. The average return 12-months following that shock tallied 8.6%.
Lerner notes the three instances where stocks were down a year later coincided with a recession.
“The Russia-Ukraine border crisis complicates the near-term market outlook. That said, history suggests these types of events, which can be devastating from a humanitarian standpoint, tend to have a fleeting market impact unless they lead to a recession. Our work suggests recession risk in the U.S. remains low,” Lerner said.
That doesn’t mean these types of events don’t stand to cause portfolio pain in the near-term.
For instance, Lerner’s work shows the S&P 500 fell 8.2% one month after Iraq invaded Kuwait on Aug. 3, 1990.
Investors are being minded of that potential for near-term whiplash action as markets assess the risks of war.
The Dow Jones Industrial Average fell 500 points on Friday amid reports that Russia could invade Ukraine during the Olympics underway in China. Markets in Europe and Asia were under considerable pressure on Monday in the wake of Friday’s rout.
U.S. markets also traded tepidly, with the Dow down more than 300 points early on in the session. Stocks were off their lows of the day as a Russian official reportedly left the door open to diplomacy on the Ukraine situation.
But closely watched Morgan Stanley strategist Mike Wilson said in a new note that he sees a “polar vortex” for stocks if there is a war between Russia and Ukraine. Wilson’s view is that said war would tip the U.S. into recession amid a spike in energy prices, which would hit corporate profits.
Others agree it could be wise getting a little defensive in terms of one’s portfolio.
“You need to be with those names that will have some protection in a downdraft. Defensive names are a good place to be. One being dividend growth stocks,” said Homrich Berg CIO Stephanie Lang on Yahoo Finance Live.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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