As if we have not seen enough of dramatic events and uncertainty in the last two years, the events in Europe on February 24, 2022, I think has surprised everyone. Our thoughts and prayers are with the people of Ukraine and their European neighbors. The loss of human life and violation of international borders for reasons so difficult to articulate is very hard to understand. As a financial advisor, I am challenged with explaining the affect events such as these could have on the financial futures of my clients.
This invasion’s impact on the markets follows other headwinds caused by the ongoing COVID-19 pandemic (not over yet), record high inflation, and potential aggressive action by the Federal Reserve (see blog from February 28). However, looking back historically, the economic impact of geopolitical crises has been relatively short-lived. The following chart shows how the market has performed during previous significant political crisis events. It is important to note, that in three of the four events when the market was down twelve months later after the event, stocks were already in Bear Market before the crisis event:
Even though predicting the short-term future of markets is unknowable, I encourage people to view their finances through binoculars and not a microscope. Plan your income and spending at times of calm and quiet. Know your needs for money for the next few years and then plan with your advisor where that money will be coming from. If you will need to be selling some of your stocks or mutual funds, be selective of the timing of those transactions. Sell when it is good for you. Don’t allow yourself to be painted into a corner and be forced to sell at a bad time.
Have you ever been on a plane when the pilot announces upcoming turbulence and advises fastening your seat belt as the crew starts collecting beverages, cups, etc? Some passengers (and maybe even you) get very nervous. Some even reach for the air sick bag just in case. But who is not nervous?
The pilot and the crew. While some of passengers are nervous or even afraid. The pilot and crew have been through this turbulence before and know that it will pass and they will arrive safely at the destination. In times of turbulence, fasten your seatbelt, put away your phone or computer…but above all, don’t jump out of the plane.
The returns on investments in companies (ie. Stocks and stock mutual funds) will follow the earnings (profits) of companies. Not what you “think” stock prices will do or even what you might guess profits will be, but the actual increase or decreases in earnings (or profits). Over the past two years (pre-COVID to post-COVID), earnings have grown 39%. Clark Capital and other money management firms are projecting the corporate earnings of the S&P 500 to grow by 10 to 12% in 2022. These projections are an opinion and not guaranteed.
If you are using binoculars and not a microscope to view your finances, events as catastrophic as World War II, while being disasters with the disruption and loss of human life and disruption of normal commerce, have not affected global markets to the extent many “passengers” on the plane would fear.
Remember, historically, going back to 1941, the S&P 500 has made money in 63 of 80 years. The average mid-year decline during the past twenty years has been 15%. As of February 26, the S&P is at 4,365 which is down 8.23% since the beginning of the year. At the risk of repeating myself, the market actions of these past two months is normal. It may look, feel, smell, or taste different. But the events of today are merely a different version of events of the past.
Remember, plan your spending and your cash flow. Know where the money is coming from to finance your goals. Your financial plan is the vehicle that drives your investments. Periodically, review the investments just like you service your car. Make adjustments as needed to accomplish your priorities. But make these changes carefully and thoughtfully. Avoid making impulsive decisions.
Wollman Wealth Designs, Inc is a financial planning firm, with an office in Escondido, CA, partnering with families in San Diego County and around the country. Please call or email with questions or comments.
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"The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results."