War is emotional, but rarely impactful on company profits
Paul Fain, CFP®
There is a humanitarian crisis in Ukraine. The loss of life is tragic and disturbing. And it is OK to wonder, “What does this mean for my investments?”
Our financial planning firm recently hosted a current events webinar with Apollo Lupescu, Ph.D., vice president of Dimensional Fund Advisors, a global investment firm.
How will the war impact stock prices? Apollo remarked that the nature of stock markets is to fluctuate, and the U.S. stock market was already down 12% before the war began. He noted that the market has actually increased 1% since the beginning of the invasion on Feb. 24. We should expect stock prices to be “choppy” around the event, with some companies going up and some going down.
A war is an emotional event, but pragmatically it does not have so much impact on company profits. For instance, companies such as Apple, Tractor Supply and Meta have small sales in Russia. His advice? Stick to your investment plan. Buy stocks for long-term growth and buy bonds for portfolio stability. Market declines present opportunities to rebalance your portfolio.
Regarding other current events, Apollo commented on the recent spike in inflation. He noted that the Russian invasion has disrupted trade flows in corn, wheat and oil, contributing to price increases. However, Russia and Ukraine are only about 2% of the world economy.
He said we are not in a panic zone like the 1970s or 1980s. Furthermore, the expectation for the next five years is a more tolerable 3.4% rate of inflation. Investors can seek to hedge against inflation with tools like Treasury Inflation-Protected Securities (TIPS) bonds. Also, he emphasized the importance of building a diversified portfolio to stay ahead of inflation. Historically, stock investing has provided a 5% real return above inflation while bond investing has exceeded the bogey by about 1%.
Will the midterm elections be good or bad for the market? Apollo referred to market data back to 1926: During unified governments under Republicans the market averaged 14.52%. Under Democrat unified government, the market averaged 14.52%. The same return. His advice? Don’t make investment decisions based on politics. Companies adapt to economic conditions, not elections.
On rising interest rates, he said that markets adjust immediately to Federal Reserve actions and that rates in the economy may be influenced by other factors including company performance and supply/demand. Are we in a bond bear market? Apollo added context: During the past 30 years, short-term bonds have experienced one year with a loss while intermediate-term bonds have suffered only two years with a loss.
In summary, Apollo acknowledged the volatility of current events but encouraged investors to disentangle emotions from investing and to maintain our long-term financial plans.
This article was initially published in the Knox News Sentinel on March 25th, 2022