March 2, 2022
- Russia was about 3% of global GDP before this invasion, and across the portfolios entrusted with our care, direct exposure was significantly less than that.
- There has been some talk about Russia just being “a big gas station” which is about right in terms of its economic impact on the economy; however, we are not sanguine enough to write this off considering that the country does have a fully functioning nuclear arsenal, of which the world has recently been reminded via not-so-subtle threats.
- There will be some indirect impacts that the market has not yet fully priced into stocks due to the uncertainty surrounding the situation. For example, how will companies withdrawing from business and/or joint ventures in Russia be compensated, if at all?
- A knock-on effect of this is that the market seems to be saying bad news may turn out to be good news as the expectations for interest rate increases by the Federal Reserve this year have become significantly more muted. The Fed has been managing asset values for over a decade now, and even with inflation raging, they will likely be less aggressive in their actions than if the geopolitical landscape was calmer.
- No one likes owning fixed income during a stock bull market, and we are no different than most market participants in expecting modest returns from bonds over the coming decade; however, in the short-term, high quality fixed income has once again proven to be a good anchor to windward during acute periods of stock market stress as shown by the 10-year Treasury having dropped from just over 2% to about 1.7% as of the writing of this note. Bonds are still down for the year, but they are reacting as they have historically when uncertainty is so high.
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