Markets and economy

Hope and discipline amid today's uncertainty

4 minute read
  •  
March 02, 2022
Markets and economy
Market volatility
Vanguard news
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Inflation

Commentary by Greg Davis, Vanguard chief investment officer

Events in Ukraine are creating a human toll and immeasurable suffering. Economic responses, including sanctions, have led to market turmoil and anxiety about what may come next. An emotional reaction is natural.

When it comes to investing, however, it’s best to resist the urge to act. It’s not easy, but in a situation such as this, we suggest you steel yourself for what may come and try to keep emotions out of investing decisions.

Despite the uncertainty that has gripped the markets and the likelihood of continued volatility, we’ll one day view today’s events in retrospect. Vanguard has studied more than two dozen geopolitical events, some of which roiled the markets, and that gives us hope.

Geopolitical sell-offs have often been short-lived

Notes: Returns are based on the Dow Jones Industrial Average through 1963 and the Standard & Poor’s 500 Index thereafter. All returns are price returns. Not shown, but included in the averages, are returns after the following events: the Suez Crisis (1956), construction of the Berlin Wall (1961), assassination of President Kennedy (1963), authorization of military operations in Vietnam (1964), Israeli-Arab Six-Day War (1967), Israeli-Arab War/oil embargo (1973), shah of Iran’s exile (1979), U.S. invasion of Grenada (1983), U.S. bombing of Libya (1986), First Gulf War (1990), President Clinton impeachment proceedings (1998), Kosovo bombings (1999), September 11 attacks (2001), multiforce intervention in Libya (2011), U.S. anti-ISIS intervention in Syria (2014), and President Trump impeachment proceedings (2019 and 2021).

Sources: Vanguard calculations, as of December 31, 2021, using data from Refinitiv.

As the illustration shows, it hasn’t taken long for equity markets to recover from initial sell-offs in response to geopolitical events. Yet we wouldn’t have predicted such quick recoveries near the onset of any of these historical sell-offs. Nor do we predict one now as markets digest fast-moving developments related to Ukraine. Rather, we want investors to remain aware of the risks.

A new challenge for markets and policymakers

Inflation, already accelerating to multidecade highs, may have impetus to climb further still, beyond Vanguard’s previous expectations, as the supply of goods from the region is constricted. Higher energy prices coupled with a potentially more challenging business environment owing to the conflict could weigh on economic growth and corporate profits. As a result, equity markets may respond poorly in the short run.

The Vanguard Economic and Market Outlook for 2022 discussed the challenges we expected for policymakers who aimed to promote still-fragile COVID-19 economic recoveries and stifle worrisome inflation. The uncertain events in Ukraine make the policy calculus, especially for interest-rate-setting central banks, more problematic than it had been.   

Invariably, the markets will test investors’ resolve yet again. Such environments may turn investors toward unhealthy behaviors such as abandoning well-considered asset allocations and trying to time the market, somehow picking not only the right time to exit, but also the right time to get back in. 

Don’t do it. Instead, maintain discipline and focus on what you can control, among the tenets of Vanguard’s Principles for Investing Success. They’re what keep investors, in the long run, still standing.

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