Commonfund Perspective on the Russian Invasion of Ukraine

February 25, 2022 |
2 minute read
|

Key Takeaways

  • As widely anticipated, Russia invaded Ukraine on Thursday, February 24th, causing volatility to spike across the capital markets globally.
  • By the closing bell in the U.S., however, stock markets rallied, closing in positive territory; and treasury yields recovered as investors were buoyed by comments from President Biden.
  • The short- to medium-term impacts remain uncertain, so we expect heightened volatility to continue.
  • We are watching carefully as the situation evolves, and our investment decisions, as always, will be driven by our assessment of intermediate and long-term impacts, not on short-term daily or intra-daily volatility.

On February 24, 2022, after weeks of posturing and futile attempts at negotiations, Russia attacked Ukraine, vowing to “demilitarize” the country and replace its leaders. While ongoing uncertainty around Russian intentions has been part of the “risk off” environment this year, market jitters were already heightened prior to these most recent events due to concerns over high inflation, a hawkish turn by the Fed, and elevated market valuations.

The volatile reaction by markets to the news out of Russia was to be expected as investors digested the short-term and unknown longer-term impacts of a material geopolitical event. While the S&P 500 began the day down over 2.6 percent, it eventually rallied to close up 1.5 percent, as fears of another inflationary spike abated following President Biden’s comments that Russian sanctions would be targeted toward sectors such as technology and banking rather than oil. This led to a tech rally with the NASDAQ index closing up 3.4 percent, the largest one-day gain since March 2021. Similarly, while the yield on 10-year U.S. Treasury notes at one point fell to 1.85 percent, they ended the day at 1.97 percent as sentiment shifted. WTI crude spiked nearly 9 percent intra-day only to settle in up just under 1 percent.

European markets had already closed prior to President Biden’s address and the subsequent U.S. equity market turnaround. However, it is unclear if Europe will stage a similar recovery given it will likely be more severely impacted by the geopolitical unrest. Two of Russia’s top five trading partners are Germany and the Netherlands, while Italy, the UK, Poland, and France are in the top 12. In contrast, Russia is a relatively small trading partner with the U.S. with a trade deficit of $23 billion in 2021, mostly driven by energy imports. Additionally, since 2018, Russia has reduced its holdings of U.S. Treasuries to negligible levels. 

Federal Reserve officials today signaled that this event will not deter the FOMC from its hawkish posture and desire to tame inflation that is now at a 40-year high. However, they did acknowledge that implications of the Ukrainian situation for the medium-term economic outlook in the U.S. will be a factor in setting the pace at which to remove accommodation. 

Given the uncertainty both domestically and abroad, we anticipate a continued volatile environment for capital markets. While it is difficult, and perhaps foolhardy, to tactically position portfolios in anticipation of or in reaction to geopolitical events, we have been taking steps to reduce overall risk in client portfolios. At the end of December, we moved our discretionary portfolios from an overweight to a neutral position in equities while expressing a preference for credit over core fixed income due to the rising rate environment. We have been in contact with our managers to assess portions of the portfolio that may be impacted by the events unfolding in the Ukraine. We will continue to evaluate any changes to the market and economic environments stemming from this recent news. However, while we must carefully watch significant events such as the Ukrainian situation, our decisions are driven by our assessment of their impacts on capital markets over the intermediate and long term, not on short-term daily or intra-daily volatility.

Stay connected with the Insights Blog

Popular Blog Posts


Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Investment Strategy | Insights Blog

What is an OCIO?

Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing...

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.