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Friday, Sep 29, 2023

LABJ Stock Index: The Geopolitical Impact on the Markets

On Feb. 24 Russian forces invaded Ukraine in the largest military campaign in Europe since World War II. Our thoughts are with all of those who are impacted, especially our colleagues, clients and their families.

As investors, our job is to assess what impact the conflict might have on the global economy and financial markets and then determine whether we need to change the advice we are giving about portfolios. To do that, we are watching two areas: the extent of the sanctions placed against Russian entities and the impact on global energy prices.

President Biden, along with a number of European countries, promised tough sanctions against Russia if it invaded Ukraine. At the time of publication, President Biden announced measures that would severely limit Russian banks’ ability to transact in dollars, euros and yen; sanctions on Russian elites and their families; and export controls that are meant to block Russia from receiving semiconductors and other technology.

The clearest economic and market risk of this conflict is that it catalyzes an energy price shock and a period of stagflation. A scenario like this would resemble the aftermath of the Yom Kippur War in 1973. In that event, the S&P 500 fell by about 40% and didn’t fully recover until 1980. Given that Russia produces roughly 12% of the world’s oil and about 17% of the world’s natural gas, that risk may seem high. In the end, that risk is real, and it is a much greater possibility for Europe than the United States. The United States only imports 1% to 3% of its oil and gas from Russia. Additionally, it seems like energy was intentionally left out of the sanctions package by both European and U.S. policymakers because of this risk.

So, what should investors do? The first thing to do is remember that staying invested in a diversified, goals-aligned portfolio has paid off through countless geopolitical crises, wars, pandemics and recessions, and will likely continue to do so. A J.P. Morgan team member can help you determine the best course of action for your portfolio, given the market volatility.

Source: J.P. Morgan Ideas & Insights, Feb. 25, 2022, “What impact might the Russian invasion have on markets?” by Jacob Manoukian, U.S. Head of Investment Strategy, J.P. Morgan Private Bank.


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