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A Perspective on Ukraine

The rising temperatures in recent days boiled over with Russia’s stunning overnight assault on Ukraine, with armored columns and airstrikes against numerous cities, including the capital of Kyiv. On a humanitarian level, we mourn what will most likely cause significant loss of life, and the largest disruption of a peaceful Europe since the end of World War II.

On a geopolitical level, the Russian leader has unmistakably defined his singular motive.  Those who had relied on game theory, believing that Putin was rattling sabers primarily to extract political and economic leverage, must now accept that his desire is instead to restore a long-coveted former Soviet republic to Russian control. This striking military move puts Russia again at NATO’s doorstep, and in return, Putin is willing to accept the radical isolation of his nation both financially and economically. The door to begin operating the Nord Stream 2 natural gas pipeline, thereby unlocking tremendous revenue for what is in many respects a surprisingly poor country, has now been slammed shut by Germany, Russia’s largest target customer. And beyond the fossil fuels sector, a future set of sanctions could include barring Russia from the SWIFT system, an essential executor of international financial transactions.

The shock to the world order is already being felt far from Eastern Europe. Chinese leaders must weigh competing factors. On the one hand, they are surely fixed on the response of the U.S. and Europe in Ukraine as a gauge of what to expect from the West should China invade Taiwan, which they view just as possessively as Putin sees Ukraine. A response that fails to deter Russia could embolden those ambitions. However, China’s trade with Russia—an economy smaller than that of Texas—is a fraction of its exposure to Europe and the United States.

Financial markets are reeling from the day’s horrific news, though for the most part, measures of volatility seem to be rising faster than actual asset prices are declining. Russian equities, of course, have been hit extremely hard, off by a third or more in early trading, while oil, natural gas and even wheat— all major Russian exports—have rallied strongly. While most early gains have been in the solid single digits, natural gas prices in Europe have registered pops of more than 50%.

In bond markets, a traditional flight to quality is underway. Treasuries are gaining, higher-rated credit issuers are outperforming the lower-rated, and longer maturities are outperforming the short end. Gold, too, is behaving as it often does in moments of uncertainty, providing a shock absorber as risk assets falter. In short, volatility doesn’t help capital markets attract capital: it tends to reduce liquidity, and goad capital into what are deemed “safe-haven” investments. It certainly serves to constrain the expansion of equity valuation multiples, putting an even greater onus on corporate earnings if stock prices are to advance further.

At the same time, the alarm in Europe may help call attention to broad economic trends that have been in train for some time. The prospects of further sustained supply shocks emanating from a major commodities exporter have only buttressed my view that U.S. growth is poised to decelerate after years of Covid-induced fiscal stimulus that equaled the combined economies of Florida, Texas and California. In fact, growth and monetary hawkishness may have already reached their peaks for the cycle. Real GDP growth was 5.7% in 2021 and should trend markedly lower in 2022, 2023 and beyond as stimulus dissipates, the Federal Reserve and other global central banks strive to finally unwind years of ultraloose policy, and supply-chain bottlenecks begin to unclog, freeing prices for many goods to return toward trend.

While the events in Ukraine may rattle business sentiment and growth expectations, they also could keep a floor on crude oil and agricultural prices for a reasonable period of time.While we do not believe that slower growth and geopolitical uncertainly should precipitously alter any client’s wealth management roadmap, such moments can be unsettling. Please reach out to us if you have questions, concerns, or updates to share on your personal circumstances that can help us consider adjustments to your overall wealth strategy. In the meantime, we will continue to monitor events—both economic and geopolitical—while keeping a disciplined eye on your long-term goals.