Should you sell shares in response to a conflict in Ukraine?


The recent escalating tensions between the United States and Russia have undoubtedly had an impact on financial markets. The S&P 500 is close to 10% off its high. As an aside, a previous article discussed the performance of the S&P 500 after a 10% correction. Apart from the human tragedy of these events, should investors sell stocks because of this risk?

The examination of twenty-nine major geopolitical crises from the Second World War should help answer this question. On average, stocks are three months higher after a geopolitical shock, and in sixty-six percent of events stocks were higher after just one month. The chances of stocks being higher increase as time passes after the event. Also, stocks sometimes jump sharply after a crisis, so getting out of the market could have significant opportunity costs. In the short term, there is conflict-related downside risk, as stocks fell 26% in the month after Germany invaded France in 1940.

Although, on the whole, these geopolitical events have a limited medium-term impact, it sometimes happens that they have more severe repercussions on the economic environment and the financial markets. During World War I, the New York Stock Exchange (NYSE) was closed for about four months, and stocks fell about twenty percent when reopened. In a more recent example included in the analysis, following the September 11 terrorist attacks, financial markets did not resume activity until September 17, with the S&P 500 falling nearly 5% on the day.

Over the long term, stocks reflect earnings, and despite the challenges of rising input costs, fourth quarter earnings supported stock prices. Results continue to be well ahead of expectations. 84% of S&P 500 companies have reported earnings so far, with 77% and 78% beating consensus earnings and sales estimates, respectively. The S&P 500 has 54 companies expected to report earnings this week.

Actual earnings performance exceeded expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate improved to 30.9% year-over-year from 21.4% expected at the end of the quarter.

The US consumer remained resilient to rising inflation. Retail sales data released last week was significantly better than expected and helped boost expectations for economic growth in the first quarter. Notably, this consumer resurgence came despite Omnicron’s rampaging infections in January. Overall retail sales rose 3.8% month over month, while non-store retail sales, which include online sales, climbed 14.5%. Online sales and a monthly drop in restaurant and bar sales reflect the impact of infections on consumer preference away from person. This trend should bode well for continued consumer spending, as the pace of infections has already begun to decline precipitously.

In summary, stock declines associated with geopolitical fears have generally been a temporary setback and an opportunity to buy at a discount. Investors should, however, be prepared for additional volatility during these times. Additionally, investors should maintain enough low-risk assets, such as cash and high-quality bonds, to cover their living expenses during one of these unforeseen disruptions. Six speakers from the Federal Reserve are on the agenda this week, and investors will be listening closely for clues as to how big March’s rally is and how much of a full tightening is expected this year. All fundamentals could once again give way to fears of rising US-Russian tensions over Ukraine.


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