Staying the Course May Be the Key to Wartime Investing

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Ken New

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Entire sectors of the global economy are in turmoil after Russia’s invasion of Ukraine, leaving investors worried about how they should react. Should they buy energy stocks? Shares of defense contractors? What about agriculture? Is it time to go to cash?

Investors had good reason to be wary even before President Vladimir V. Putin of Russia invaded. First-quarter market forecasts predicted tepid gains of less than 5 percent for the S&P 500. A report from the financial data company FactSet Research noted that such a sluggish level of growth would be the lowest since the fourth quarter of 2020.


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Ukrainian army soldiers outside Mykolaiv. Markets dropped even before the Russian invasion on Feb. 24, and the S&P 500 index finished down 4.9 percent for the quarter. Tyler Hicks/The New York Times


Instead, the S&P 500 finished down for the quarter, losing 4.9 percent. Inflation fears prompted a big drop at the end of January, and stock prices remained volatile even before the Russian attacks started in late February. Share prices plunged immediately before the invasion, regained ground, then dropped even lower in early March. But since Feb. 23, the day before the invasion, the index gained 7.2 percent for the quarter, suggesting that there’s more than the war in Ukraine worrying the market.

“Initially, there was a lot of fear about what could happen and, as usually is the case, most of that didn’t happen, so people are backing off,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “Most investors are thinking, ‘This isn’t something I need to worry about from a financial perspective,’ and that’s correct.”

That’s not to say that investors making the obvious war plays haven’t been able to cash in on the carnage. The energy sector had already been forecast to do well in 2022 before war sanctions cut off Russia’s oil exports and ended the quarter just slightly off its 52-week highs. Defense industry exchange-traded funds, or E.T.F.s, are turning in the same results. Additional strains on the already tangled supply chain as well as the expected disruption to Ukraine’s huge wheat crop pushed commodity funds up, too.

Rather than fret about Mr. Putin, investors should worry about Jerome H. Powell, chair of the Federal Reserve. The Fed raised interest rates by a quarter percentage point in March for the first time since 2018 and projected six more increases this year.

“The market reaction in the past four to six weeks can almost all be attributed to the Fed and how interest rates have moved,” Mr. McMillan added. “There’s been very little response to events in Ukraine.”

Investors haven’t fully appreciated what rising interest rates mean for the stocks in the financial sector, especially banks and insurance companies, which have suffered from a prolonged stretch of near-zero interest rates, said Andy Kapyrin, the co-chief investment officer of RegentAtlantic. “The market hasn’t yet priced in the benefits financial stocks are going to see from higher interest rates,” he said. “Banks in particular can make a much higher interest-rate margin as short-term rates rise.”

Stocks that could suffer from higher rates include shares of small, emerging software and e-commerce companies and other capital-intensive tech firms that have depended on borrowing heavily at low rates until they can turn profitable, Mr. Kapyrin said.

Individual investors should maintain a long-term horizon even in retirement, which can last 30 years or more, said Simeon Hyman, a global investment strategist at ProShares. That means ignoring stock plays based on temporary upheavals.

“Historically, downturns in the equities market from major geopolitical events are fairly short-lived,” Mr. Hyman said. “If you look at what happened after 9/11, the global pandemic or the invasion of Kuwait, the downturns were measured in weeks or a couple of months.”


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An apartment complex courtyard in Kyiv was hit by a Russian strike last month. Investors should keep thinking long term, experts say, and not make big changes based on war-related volatility. Ivor Prickett for The New York Times


Amy Arnott, a portfolio strategist with Morningstar, strongly warned investors against dumping stocks and moving into cash. The paltry returns on bank deposits and money market funds won’t necessarily improve with the Fed’s rate increases and, even if they did, they still wouldn’t beat inflation, resulting in a loss in terms of real dollars. Even worse, bailing out of stocks raises the much more difficult challenge of deciding when to get back in.

“You can always find a good reason to sell when there’s a lot of uncertainty,” Ms. Arnott said, “but the markets bounce back faster than people might expect.”

She said it was important not to overlook consumer staples and assume that inflated operating costs will trim corporate margins. The reality is that those companies are able to pass their increased costs on to consumers, with some companies using inflation to hide additional price increases.

“Consumer staples tend to hold up real well whenever there’s a lot of volatility in the market,” Ms. Arnott said.

Investors should also pay closer attention to bond funds, several analysts said. Bonds serve as an important stabilizer in a diversified portfolio, but today’s rising interest rates hurt the value of existing lower-rate bonds. That trend will reverse as the old bonds mature and are replaced by new, higher-rate bonds. Already, yields on five- and 10-year corporate bonds are near 4 percent.

“There’s a lot of talk about, ‘Rates went up and my bond fund values went down,’ but your bond fund now gets to reinvest your money at a higher return,” Mr. McMillan said.

One move that doesn’t involve making any drastic changes is a simple one, said Leanna Devinney, vice president of the Fidelity investor center in Framingham, Mass.: rebalance your holdings.

“During volatile markets, your asset diversification can shift, and rebalancing gives you an opportunity to manage risk and to keep your investments aligned,” Ms. Devinney said. “We want to buy low and sell high, and rebalancing is a great way to do it.”

How frequently investors should rebalance their holdings depends on the level of market volatility, she added. The Fidelity management team already has rebalanced investments six times this year.

For investors still anxious about Ukraine, Covid, supply chain shortages, oil prices and other geopolitical unrest, the best move is to assemble a diversified portfolio that can take global crises in stride without needing major adjustments. And investors who have already done so shouldn’t make any knee-jerk decisions, analysts say.

“The best advice for investors is to try to resist the urge to make dramatic changes to your portfolio,” Ms. Arnott said. “As long as your original plan still makes sense, stick with your plan, check that your portfolio allocation is in line with your targets and rebalance if needed.”

If, after all that, investors still feel anxious, consider this observation from Mr. McMillan of the Commonwealth Financial Network: “If you look at the past century and how markets perform during wartime, they actually do better,” he said. “As a citizen, am I’m worried? Absolutely. As an investor, not so much.”

c.2022 The New York Times Company

This New York Times article was legally licensed through AdvisorStream.

Ken New profile photo

Ken New

Financial Advisor
Pinnacle Financial Wealth Management
Office : (321) 454-3623
Let's Chat!