Russia-Ukraine: Weathering The Storm
It’s gut check time, folks.
Ukrainian President Volodymyr Zelenskyy has declared martial law and Russian warplanes are striking targets in the country. You can practically smell the fear on Wall Street.
The Russia-Ukraine crisis has sent global equities tumbling and crude oil prices soaring. Crude has topped $100 per barrel for the first time since 2014. Gold prices also have spiked, to their highest levels since January 2021.
The Russian stock market is witnessing its worst decline in history, and the Russian ruble has hit its all-time low against the U.S. dollar.
Inflation already was running hot, even before Russian President Vladimir Putin invaded Ukraine and sent oil prices through the roof. Energy supply disruptions and Western sanctions will only exacerbate inflation and overall economic turmoil.
How bad will it get? It’s a fool’s game trying to predict when this geopolitical crisis will pass. But it eventually will.
The worst move you could make right now is to sell into weakness, out of panic. As I explained in my video presentation Wednesday, financial markets tend to bounce back fairly quickly after the trauma of war’s outbreak fades.
People are always surprised when I point this out, but during World War II, from its start in September 1939 to its conclusion in August 1945, the Dow Jones Industrial Average gained 50%. The Dow tanked after the Japanese bombed Pearl Harbor in 1941, but shortly thereafter the stock index rebounded and steadily rose for the duration of the global war.
If stocks could withstand WWII, they can withstand the Ukraine conflict. The lesson of history: It’s best to ride out the downturns, provided you’re properly diversified with a long investment timeline.
The U.S. dollar, gold, and other safe havens are soaring, as the violence in Ukraine hits the risk appetite of investors. February is shaping up to be the worst month for stocks since March 2020, when we witnessed the nadir of the pandemic-induced crash. But if you’ve been following my recent advice on hedging strategies, your portfolio should be positioned to weather the storm.
Let’s look at the good news. For starters, corporate earnings and revenue growth have been robust. For Q4 2021, with 84% of S&P 500 companies reporting actual results, 77% of S&P 500 companies have reported a positive earnings per share (EPS) surprise and 78% have reported a positive revenue surprise. For the quarter, the blended year-over-year EPS growth rate for the S&P 500 is 30.9%.
If 30.9% turns out to be the actual growth rate for the quarter, it will mark the fourth straight quarter of earnings growth above 30%.
It’s telling that few S&P 500 companies to date have mentioned “Ukraine” on Q4 earnings calls, albeit with greater frequency than past quarters (see chart):
Keep in mind, S&P 500 companies overall have little revenue exposure to Russia and Ukraine. The combined revenue exposure of the S&P 500 to Russia and Ukraine is about 1%.
In our 24/7 interconnected global economy, you should pursue profits in every corner of the world. Proper diversification includes assets spread among geographical regions. If you look beyond the headlines, you can find opportunity in conflict.
This has been a turbulent year in terms of geopolitics, as Russia invades eastern Ukraine and China continues to spat with its smaller neighbors over territorial claims.
Conflicts can give global investors pause, especially since the calculus behind geopolitics is often opaque. But it’s important to remember that investing is essentially a zero-sum game. Any money one investor loses goes into another investor’s pocket. Rather than panicking about rising global volatility, the key to success is to keep your nerves in check and look for the winners in any given situation.
During the Russia-Ukraine crisis, one of those winners is gold. As I’ve written in previous articles, you need gold in your portfolio as a hedge against inflation and geopolitical uncertainty.
Gold prices have been surging in recent days and they’re positioned for further upside. The time to increase your exposure to gold is now, before investors bid the yellow metal sky high. For details on our investment team’s favorite gold play, click here.
John Persinos is the editorial director of Investing Daily.