Our thoughts on how the Ukraine crisis impacts your portfolio

February 28, 2022

Dear Friend,

We hope this letter finds you well.  Over the past several days, we - along with the rest of the world - have watched as the Ukrainian people, their military and government courageously fight to maintain sovereignty in the face of Russian invasion. First and foremost, our thoughts are with the Ukrainian people during this difficult time.

As we grapple with the injustice of the humanitarian and geo-political crises unfolding, our firm objectively considers the impact these actions could have on clients’ portfolios. We remind our clients that in a “headline-driven market” we are focused on long-term financial goals. Historically, during extreme periods for the market, investors consider decisions that could undermine their ability to build long-term wealth. It can be difficult to sift through headlines and understand what it all means for you and your portfolio.  Below are several high-level market thoughts, followed by a series of questions and answers to provide fact and clarity during a time of uncertainty:

  • For the first two months of 2022, stock and bond market indices have produced negative returns due to rising interest rates and inflation.
  • While a myriad of potential outcomes still exists, we believe Russia-Ukraine tensions represent a relatively low risk to U.S. corporate earnings.
  • We see global inflation risks rising - specifically within energy – as Russia is currently the world’s third largest producer of oil in the world.
  • We continue to believe the Federal Reserve’s monetary policy response to heightened inflation is the most important variable relative to the markets in 2022.
  • We believe that creating a diversified portfolio, developing a proper time horizon, and setting realistic return expectations is the correct path to long term investment success.

Why did stocks and bonds go down so sharply in January?

The S&P 500 finished 2021 up nearly 29% and was one of the best market years in history.  As we noted in our New Year letter, it would be improbable for 2022 markets to be as good as 2021.  Covid-related economic support from the federal government and Federal Reserve has ended and our economy now must function without stimulus such as PPP loans, extended unemployment benefits and stimulus checks.  Also, it is expected that the Federal Reserve will begin to raise interest rates to tame growing inflation, potentially slowing down economic growth going forward.

In the first three weeks of January, short-term traders began to reposition their portfolios to sell both stocks and bonds prior to the announcement from the Federal Reserve on January 25th. The message from the Federal Reserve was ‘as expected’ - they provided guidance to the markets that they plan to raise rates. For the month of January, the S&P lost 5%, the Nasdaq lost 9% and the Barclays Aggregate Bond Index, driven by rising interest rates, lost 2%.

Generally speaking, why do bonds go down in value when interest rates rise?

There are many types of bonds, and it is not accurate to say all bonds go down when interest rates rise.  At the most basic level, when interest rates rise newer bonds are issued at higher rates, making older lower yielding bonds less attractive. This results in lower prices for existing bonds.  In 2022, central banks will “tighten” the money supply by increasing interest rates to slow inflation.  During inflationary times, many bonds may not provide a rate of return greater than inflation, making the asset class slightly less attractive in the short-term.  Thus, in the current environment bonds may be owned more for capital preservation and income as opposed to generating any real growth. In the longer term, a move to a more normalized interest rate environment may be a positive for investors as low risk investments may provide more return.

Can rising interest rates impact stocks?

Certain sectors of the stock market tend to benefit from rising rates while other sectors can be negatively impacted. For example, banks can earn more money on higher interest loans, while other sectors, like technology, are hurt by rising rates as their future earnings won’t grow as quickly. In general, higher interest rates mean consumers must pay more interest on their loans, and therefore have less money to consume and spend.  Higher interest rates also mean corporations pay higher rates on their debt and their profit growth can slow. It does not always play out exactly this way, but on trading days where the headlines suggest rates will move higher, financial stocks tend to perform well and technology stocks tend to perform poorly.  The NASDAQ in particular is an index heavily tilted towards tech companies and can be sensitive to headlines about interest rates.

Are rising interest rates the reason the NASDAQ has declined so much this year?

Generally speaking, yes.  Six technology companies comprise 45% of the NASDAQ 100 (Apple, Microsoft, Amazon, Tesla, NVIDIA & Alphabet). The NASDAQ is down 12% for 2022 which is exceptional in a short period of time.  From its peak value towards the end of 2021 until now, the NASDAQ entered a bear market where it suffered over a 20% decline.

Can you recover from a bear market, and should we stay away from technology stocks?

The S&P 500 has had 24 bear markets since 1928.  Every single time the market recovered and eventually moved on to new all-time highs. Our advice is to be patient.  The technological innovation happening in the United States is exceptional and it is not a sector to avoid over the long term.

January was a down month, but February was not much better.  What happened in February?

In February, heightened geopolitical risks impacted markets as Russia’s military began amassing at the Ukraine boarder.  Speculation of a Russian invasion contributed to the already volatile markets and a further decline of stock and bond indices took place.  By Wednesday of this past week, the S&P entered a correction which, by definition, is when a market declines between 10% and 20% from peak value. Despite terrific gains on Thursday and Friday this week, the major indices for the year are now S&P -8%; Nasdaq -12% and the Barclays Bond Aggregate -4%.

Market corrections are more common than bear markets.  A correction represents a decline between 10% and 20%.  Since 1928, this has typically happened every 19 months on average. We had not had a market correction in the S&P since March of 2020 so statistically a correction was overdue. There have been 33 market corrections since 1980 and the index has been higher one year later 90% of the time - with an average gain of 25%.  This clearly illustrates why we advise longer term investors to avoid panicking when markets show short term weakness.

Bonds declined again in February, is this going to change soon?

A 4% decline in a two-month period for the bond market is highly unusual from a historical standpoint.  Ironically, the Russian invasion of Ukraine has unsettled world markets and means it is more likely the Federal Reserve will be careful about raising rates or surprising the market. Thus, it is possible the bond market may see a recovery this month and a decent entry point has been created to buy bonds.

What impact on global markets will the Russian invasion have?

The Ukrainian economy alone is not significant enough to disrupt American corporate earnings or global growth.  Investors should be more concerned about the impact of Russian sanctions and what Putin may do beyond Ukraine. Crimea was annexed by Russia in 2014 and the S&P 500 and MSCI Europe indices had brief selloffs, but there was no significant market impact over the long term. While a larger multi-national conflict remains a potential outcome, it is not our base-case scenario, and are hopeful that a combination of Ukrainian resistance, sanctions on Russia, and diplomacy will end the conflict and return stability back to markets.

What impact might the Russian-Ukrainian conflict have on oil and energy prices?

Here in the U.S., we are already experiencing high energy prices.  Oil topped $100 a barrel on Thursday, an 8-year high. The U.S. only purchases about 5% of its oil from Russia at this time, so the impact is not likely to be meaningful. In Europe, Russia supplies the European Union with approximately 30% of its oil and gas.  Europe is more likely to see higher energy prices because of this conflict.  The primary economic worry for the U.S. is seeing sustained inflation which would likely mean the Fed has to raise rates higher for a longer period.

The investment opportunities are there somewhere, right?

Absolutely.  The S&P 500 and NASDAQ are more than 10% less expensive than they were three months ago.  Bonds are trading 4% cheaper than the start of the year.  The crisis in Ukraine will likely result in the Fed slowly raising rates, which is more supportive of continued economic growth and helpful to the bond market.  The energy sector, internet security companies, defense companies, and commodities are all likely to see inflows this week.  Irrespective of the headlines, there are areas to overweight and underweight in a portfolio.

And how is Gottfried & Somberg handling all this?

We continue to pay close attention to the markets, while maintaining our long-term perspective with an eye on monetary policy. Our analysts made changes to our models in January which included an emphasis on higher quality companies, increased commodity exposure, and adjustments to the duration and credit quality of our fixed income positions to account for Fed tightening. Our analysts continue to review models and research specific market sectors, as well as individual stocks and bonds for opportunities to rebalance portfolios. We will continue to adjust as appropriate.


Matt Somberg


Matthew A. Somberg, AIF®
Accredited Investment Fiduciary®
Co-Founder and Principal

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.