What exactly is Vladimir Putin up to? No one really knows except maybe the highest echelons of his inner circle.
There are no secrets about Russian troop movements, ship relocations, and joint military exercises in Belarus. This is certainly not a stealth operation.
There are several plausible reasons for Putin to start rumors of war.
- Us vs. them. A bit of nationalism never hurts the hometown popularity. By framing the Western world as the aggressor because they are considering bringing Ukraine into the European Union and NATO in the future, Putin may be able to convince Russians to support a strong leader who stands up for Russian interests.
- Test the waters. The wish list Putin submitted to avoid any conflict was exactly that. However, in response he did get a list of sanctions that would be imposed if he decides to move forward and forced Western leaders to consider how they may react militarily. From his perspective, the price tag for entering Ukraine is now clearer.
- Weaken Ukraine. Just the threat of war has created economic weakness in Ukraine. People left the country, companies shut down, and flights are limited. By simply threatening an invasion, Putin is likely reducing Ukraine’s future economic growth as companies assess the risk of doing business in Ukraine. This could make Ukraine more sympathetic to Russian influence in the future.
- Invade Ukraine. When tensions are high, mistakes can happen. It is possible Putin is looking for any pretense to invade Ukraine while claiming the moral high ground. Of course, he could also just invade Ukraine without such pretenses.
Historically, geopolitical conflicts have created short-term volatility in the financial markets. When conflicts erupt, the range of outcomes expands beyond traders’ comfort levels. Some conflicts remain regional and are resolved relatively quickly. Other conflicts expand to global disasters.
Adding a geopolitical conflict to financial markets that are already on edge about how the Federal Reserve is managing the U.S. economy, and we have a recipe for significant volatility in the coming weeks.
We simply cannot know with confidence how either of these challenges will be resolved. Thus, we must use the most valuable asset we have to prepare for an uncertain future – time.
Time blunts the impact of the day-to-day fluctuations in the financial markets. If you need to sell your investments today for cash flow, what happens in the market today really matters.
Conversely, if you need to sell your investments for cash flow in 2,000 trading days (roughly 8 years), there are still 1,999 days left for the markets to bounce back from whatever happens today. Even if downward volatility lasts a full year, there would still be 1,750 trading days left for your investments to recover.
When traders start reacting to the rumors of geopolitical and economic wars floating through the headlines, we recommend greeting today’s market volatility with the serenity of time rather than the more popular panic of the masses.
Quote of the week: Jim Rogers: “When I see hysteria, I usually like to take a look to see if I shouldn’t be going the other way. . . . Just about every time you go against panic, you will be right if you can stick it out.”
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Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.