Russia-Ukraine crisis shakes markets, stay focused on the long-term

Gargi Pal Chaudhuri Mar 3, 2022

The Ukraine crisis has gripped markets over the past month and worsened recently. Measures of volatility have spiked to the highest level since the Delta variant shocked markets last fall1. Those jitters have translated to U.S. equities in the red, Treasury yields across the curve down as investors flock to safety, and Brent crude oil surging to $100 per barrel for the first time since 2014—the same year Russia annexed Crimea.2

Our overall BlackRock Geopolitical Risk Indicator3, refreshed in mid-February, has spiked to its highest level in more than a year amid heightened market attention to geopolitical competition. This is driven by elevated market attention to conflict-related risks across the board—most notably, Russia-NATO conflict.

With higher market volatility, what is the potential impact for investors? Some clues can be gained by looking at past geopolitical events. A key conclusion from our historical analysis4 of asset price reactions to 68 risk events since 1962 is that the impact of geopolitical shocks has historically tended to be more acute when the economic backdrop is weak, and thus as economic growth slows from its 2021 peak in the mid-cycle environment of 2022, geopolitical risk may amplify volatility more sharply, particularly as elevated inflation and the uncertain path of interest rates has deteriorated liquidity in most markets.

Our analysis of six past geopolitical shocks as displayed in the chart finds that U.S. Treasuries tended to perform positively over a three-month horizon, even outperforming U.S. equities in some cases, confirming their traditional ballast properties in a multi-asset portfolio. U.S. equities and a diversified basket of commodities also tended to see positive performance when measured over a three-month horizon, demonstrating the power of staying invested in strategic equity allocations through bouts of volatility and the tactical utility of commodities as a hedging, diversifying asset class.

The bottom line, in other words, is that many investors are smart to stay put and not attempt to time geopolitical events. However, for those who want to “de risk” or move into traditional safe havens like Treasuries or commodities to potentially build some portfolio resilience, the ETF provides a flexible vehicle to make those sorts of tactical moves. ETF trading volumes tend to rise with risks in the market, providing liquidity during periods of heightened volatility.

Equity, Commodity, & Long-dated Treasury Performance 3 Months After Geopolitical Shocks

Chart showing index performance 3 months after geopolitical shocks

Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of February 18, 2022. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance is measured by the following indices: S&P 500 Index (SPX Index), Bloomberg Commodity Index (BCOM Index), Bloomberg US Treasury: 20+ Year Index (LT11TRUU index).

Gargi Pal Chaudhuri
Head of iShares Investment Strategy Americas at BlackRock
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Arjun Kapur
Investment Strategist
Jon Angel
Investment Strategist