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Russia, Ukraine, and the Markets

Published on March 22, 2022

Peter Mallouk
President & CEO
Jonathan Clements Headshot

Jonathan Clements
Director of Financial Education

This month, Peter Mallouk and Jonathan Clements discuss recent developments related to Russia’s attack on Ukraine and what they could mean for global markets.

Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

Have questions or topic suggestions? 
Email us @ podcasts@creativeplanning.com


Jonathan Clements: Hi, this is Jonathan Clements, Director of Financial Education for Creative Planning in Overland Park, Kansas. With me is Peter Mallouk, President of the firm, and we are Down the Middle. Today we’re discussing the topic that’s on everybody’s mind, the Russian invasion of Ukraine. Needless to say, Russia’s aggression is horrifying. The consequences have already been tragic with countless lives lost, but as you can expect from this podcast, our focus is the financial fallout.

From the investor’s perspective, perhaps most the astonishing thing has been the stock market’s resilience. Yes, last Thursday, the dollar initially strengthened, gold rallied and stocks fell sharply, all of which you’d expect when war breaks out, but the U.S. stock market after opening low ended higher on Thursday and that rally continued into Friday. So Peter, what the heck is going on? Why do stock investors seem to be so calm about events in Europe?

Peter Mallouk: First, what we saw is the market assumed nothing big was going to happen then Russia’s invasion was much more significant than most anticipated. The market reacted very negatively, didn’t know how to absorb that news. The next day, it appeared pretty clear that this wasn’t going to probably turn into World War III and the markets recovered. I think what we’re seeing now is the market trying to absorb all of the news, and I think really it’s taken a turn that I think is a little bit more serious.

So why would the market be down the last couple days if we think it could be contained? Well, you hear about these sanctions against Russia really attacking their lifeblood, their energy, industry, attacking their financial markets. And we’re sure there are cyberattacks happening at once. It’s the new warfare, right? And with all of those things happening, we have a couple of different scenarios.

One scenario is, well, if they’re in a corner, what are they going to do? You have somebody who may be a little irrational already having invaded all of Ukraine. But now he has said, “Look, we’re ratcheting up our nuclear preparedness.” You don’t hear that every day. Now let’s say the odds of that happening are one in 10,000 and the odds of an expanded war only being one in hundreds or one in a thousand. Well, if you are going to invest in a restaurant and somebody told you, “There’s a one in a thousand chance it’s going to burn down this year,” you would pay a little bit less for the restaurant, right? You would price that in a little bit.

And so that’s part of what the market is doing. The other part I think that we’re not really seeing in the financial media, but I think is my personal biggest concern is the law of unintended consequences. America has been really good at having a lot of unanticipated consequences to its actions. Not saying the actions we’re not taking aren’t perfectly right and that the United States isn’t doing the right thing and Western Europe isn’t doing the right thing. But when you basically cause an economic system to completely collapse, we don’t know what the fallout of that will be. This is a very dynamic financial system now. This is different than World War II, or even back in Vietnam and Korea. This is something where everything is intertwined.

The last time the Russian currency collapsed, a major hedge fund in the United States happened to collapse around the same time and the global economic system fell apart. We don’t know how intertwined all of these things are and what the consequences may be of them. I think the market is pricing that in a little bit too, and is going to be watching very carefully in the next couple weeks to see, can we get peace to break out of all of this? And if not, what are going to be the consequences of all of these actions that we’re taking that could eventually start to affect economies outside of Russia?

Jonathan: So beyond the obvious economic impact, which is higher energy prices, and we’ve seen the price of oil jump, what other possibilities do you think are out there Peter? What could we see in the weeks and months ahead beyond say some financial exposure by some hedge fund or some bank that comes back or that particular institution, do you think there’s other economic fallouts we can expect to see in the weeks and months ahead?

Peter: I think if we start to see the economic system of Russia be more tied to the rest of the global economy than we’re anticipating, or China gets engaged in some non-military way, they become an economic part of this, I think we would start to see it affect everything. I think if we take this in a vacuum and of course it’s not in a vacuum, we are going to see a sharp move up or down depending on how this scenario plays out.

Of course the tree of scenarios is greatly expanded. If you look at China is watching very, very carefully what’s happening here. I mean, their kids are trained to sing songs about Taiwan being part of China. We know the end game is for them to eventually try to take over Taiwan and they’re watching to see how the world reacts to this. If you start to see war planes around Taiwan for any serious period of time, we will see a lot of economic turmoil.

If Russia and Ukraine can work things out pretty quickly, we’ll just go back to what we had before, which is the relatively high volatility as we’re trying to figure out how to deal with inflation in the United States. To me, that’s still the main narrative. And so it’s not just that energy prices are higher, it’s that we had very high inflation to begin with. Energy is a very big component of inflation, and it’s going to drive inflation higher and faster, which puts the Federal Reserve in a little bit of a box here.

Jonathan: I wonder if we do indeed resolve the situation between Ukraine and Russia quickly, that we will actually see a significant bounce back in the stock market, because the main narrative, as you said, has been inflation and particularly the Federal Reserve’s reactions. We know the Federal Reserve is winding down its bond buying program. We know we’re going to see higher short term interest rates in 2022.

And that I think in most people’s minds is why the stock market has had a correction in 2022, why we have the S&P 500 down 10% or so. And that seems to be the narrative that was driving stock prices. In a sense, Ukraine is horrifying, but is it as important to the stock market as what the Fed is doing and what’s happening with inflation?

Peter: Yeah, I completely agree. I think that what we’re seeing now is this is the story that’s occupying all the financial news, but it’s really, in the financial markets, a subset of the bigger story. So what’s happening with Russia, Ukraine, we have a small percentage chance of a horrible scenario, but outside of that, the economic markets will survive and move on. I think if you look at inflation and how powerful it is for economy, let’s use an example of a guy building homes. Right now everyone’s buying houses, but we see that the Federal Reserve is telling us they’re going to raise interest rates. You look at JP Morgan, Goldman Sachs, they’re making predictions that there might be seven to nine interest rate hikes. So we’re talking about interest rates being a full 2% higher.

You see the mortgage market pricing that in now. You used to be able to get a mortgage in the low twos, now it’s around four. Pretty soon it might be five or six. Now, if you’re a home builder and you are originally going to buy 10 lots and you go, “By the time these homes are done, mortgage rates might be

2% higher. Maybe I can’t sell 10 homes; instead I’m going to build on six lots.” And now the people that you hired to do the plumbing and the electric, all those companies, they go to their employees, “We don’t need all of you. We thought we needed all of you to build 10 homes. We only need you now to build six homes.”

Well, now they start to let some people go. And next thing you know you’re accidentally in a recession. And so I think the stock market’s a little bit worried about that, the accidental recession and all the other things that come with inflation. Inflation eats higher interest rates, higher interest rates eat into profit margins. If everything else is equal and your payment to the bank for running your business or owning your car, your house, is higher, there’s less profits to the business or individual to spend and to apply to stock market valuation.

So I think the number one thing the market is concerned about is exactly what you said, higher interest rates, controlling inflation, and what the consequences of that may be. And to the extent that what’s going on with Russia, Ukraine accelerates that because of the inflation that we’re going to see in energy, which everybody needs energy, it’s going to drive up the cost of a Southwest Airlines ticket. It’s going to drive up the price of a meal at McDonald’s. It’s going to drive up the goods that Amazon delivers to your door, because guess what? They all use energy to get it there. So that’s a very big driver of inflation, a big part of the story, along with the tail risk that we’re facing now.

Jonathan: So just quick digression here, we may all need energy, but one thing that we don’t all need are cryptocurrencies. One of the narratives out there was that cryptocurrencies could be a good diversifier for a stock portfolio. So how’s that working for investors, Peter?

Peter: Well, so let me just give a quick 30 second recap of our position on this from the beginning. Blockchain technology is going to change the way the world works. It’s a powerful technology. It’s going to change the way we get and distribute tickets to sporting events and we hold our medical records, and deeds to homes and everything else. And we’re starting to see that adopted by very big companies like Walmart, IBM, Accenture — everyone’s moving towards the blockchain.

Cryptocurrency, Bitcoin was the first use of the blockchain. Will there be a cryptocurrency that the world can rely on? As we’ve said from the beginning, eventually, someday probably yes, there will be some cryptocurrencies that prevail as global standards, that people trust, that use energy efficiently and where you can have transactions efficiently. And now the only question becomes, well, which one? And our position from the beginning is nobody knows.

Today, there’s about 6,000 cryptocurrencies. About 99% of them have already gone to zero. Of the ones remaining, most of them have collapsed and most investors have lost their money in them. Some investors have made money in a few currencies. Will those leading currencies prevail? Who knows? The first one is usually not the one that prevails. There’s Palm and Blackberry before the iPhone. There was Excite and Lycos before Google.

Having said all that, the big argument for something like Bitcoin was, “Hey, it’s a hedge. And in a crisis, it’s going to go up.” And that has been categorically, unequivocally untrue thus far. In a crisis, Bitcoin did not go up. In fact, it went down. And so what we’re seeing is it behaves like a high tech growth stock without earnings or a meme stock where people are trading based on online forums. It basically is speculative. People investing in those asset classes are saying, “Hey, I’m not going to get any income. I don’t know if this is going to prevail. It might, I’m going to bet on it.” And it’s a speculative asset and it’s behaving exactly like a small high tech growth stock or a meme stock.

And so the argument doesn’t hold. Now, I will say there have been a lot of events recently that may accelerate cryptocurrency eventually emerging, that becomes a standard. How did Canada deal with their crisis? They started to freeze the financial assets of some of their citizens. How is the world dealing with Russia? They’re starting to freeze the financial assets of high-net-worth Russian individuals and people close to Putin and really all the Russian people.

You can see economies around the world, whether it’s Turkey or Venezuela, where people legitimately have no confidence in their government’s currency, so you can see why they would want a cryptocurrency. So I still think one will prevail, but 99% of them will go to zero. And as long as people know that they’re speculating that’s one thing, but this idea it’s a hedge, again, has shown that’s not the case.

Jonathan: So one last question on this before we wrap up the podcast, Peter, I sense talking to readers, the emails I’ve received, what I’ve seen online is that even as people are horrified by what Russia has done, as investors they don’t seem to be especially unnerved, that people have sort of taken this in stride so far. Do you have a different sense of it?

Peter: No, I think certainly Creative Planning clients have taken it in stride and it’s been awfully quiet. I mean, obviously we’ve been proactive with communications, but I think that in general, people are observing and they understand what’s going on here. It’s very sad. It is kind of amazing to watch in real time something like this happen. I know for a lot of people like my kids, it’s the first time they’re seeing something like this happen; it’s inexplicable to them.

But I think people understand that this is not the kind of thing that you make portfolio decisions over over the short run and hope to be rewarded. That you’re probably better off assuming that a ticket price to Disney World and a meal at Chipotle is going to be more 10 years from now and stick with the long game.

Jonathan: So when we were talking before about our tip of the month, Peter, you had said that one thing that you wanted to talk about as a tip of the month is using this current market turmoil to think about your tolerance for risk. So tell me more about that.

Peter: Well, I think a crisis is a great time for you to really think about your risk tolerance. So a lot of people have a high proportion of their portfolio where they own things, whether it’s stocks or private equity or real estate. And those are the things that tend to get hit harder in a crisis. And you had a very brief period of time here, a couple days to really check your temperature.

And if you were worried about your portfolio, and if you felt like you needed to make decisions over just a couple days of a news cycle, well, we are eventually going to have another tech bubble or ’08/’09 and hopefully not another 9/11, but these things happen. And these are things where those two days go on for a hundred or 200 days. And so you had a really brief period of time for the first time in quite a while to really see how you handle that stress. If you didn’t handle it well, it’s time to have a conversation with your advisor and maybe revisit the allocation.

Jonathan: And so my tip of the month, Peter is a suggestion that I would’ve made a couple of years ago, but the suggestion is this. You should actually look at your investments more often. And the reason is this, while I don’t think there’s much value to be looking at your portfolio on a daily or weekly basis, probably you should look at your financial accounts at least once a month, just to make sure they’re still there.

I mean, cyber theft has become a real issue and hopefully if it happens, your financial institution will let you know, but just in case, I make a point of going and looking your financial accounts once a month to make sure that everything is still in order and your money is still there.

Peter: Well, I’ve got to say this just because I didn’t know that was going to be your tip of the month. I have never in my career ever heard of a client waking up one day and finding out their account wasn’t there, but I still think it’s a good tip because there are criminals out there that are really working in this space. I will say my addition to that tip would be password protection.

When we do see client accounts compromised, we reach out to them and say, “Hey, someone’s compromised your computer. And they’re asking for something.” Almost always the client is using the same password in multiple places. And while you might have what you think is a very secure password, if it’s used in 20 places and one of those 20 places gets breached, the first thing they do is they go try that password everywhere else. So please use different passwords for different things, make them strong passwords, have a place to hold those passwords and you can prevent most of this from happening.

Jonathan: All right, thanks for the elaboration on my tip, Peter. So that’s it for this month, this is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to Peter Mallouk, President of the firm and we are Down the Middle.

Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.

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