Russia’s invasion of Ukraine has led to swift and significant responses from financial markets, commodity markets and numerous governmental bodies. And the push to take control of the country continues.

As news broke of the impending invasion financial markets responded negatively in terms of the equity markets while the bond market saw yields decline. However, by the end of the trading day yesterday the situation for investors had changed dramatically. In terms of equities, the Standard & Poor’s 500 Index returned 1.5% for the day while small-cap stocks, as measured by the Russell 2000 Index, saw a 2.7% move higher. To illustrate the move in bond yields, the 10-year U.S. Treasury started the day with a flight to safety trade which took the yield down to 1.86%. By the end of the trading day bonds had given up their gains as evidenced by a yield on the 10-year Treasury that had risen back to 1.96%.

Looking forward investors will be attuned to prospective developments on numerous fronts. One of the widely anticipated expectations is that the Federal Reserve (Fed) will begin implementing a series of increases in the Federal Funds rate. Currently the conflict in Ukraine is not expected to deter the Fed from starting the rate increase process at their meeting next month. Several Fed governors have made comments indicating the situation in Ukraine could potentially impact the number of rate increases anticipated for 2022 but the beginning of the process in March is not expected to be altered.

The anticipated actions from the Fed are designed to reduce the rate of inflation which has recently hit multi-decade highs. We have frequently shared our view that the rate of inflation will moderate over the course of the year. The anticipated moderation is not expected to return to pre-pandemic levels by year-end but to show a meaningful move in that direction. This view may be modified in the coming months based on higher prices for energy and numerous commodities resulting from escalation in the conflict or harsher sanctions limiting supplies of these key economic inputs.

The most important step for investors to take right now is to review their goals and objectives to ensure their portfolios are in alignment. Key components of this review should include an assessment of risk tolerance and confirmation of time horizon. The importance of a sound, time-tested investment process cannot be overstated as it pertains to the current investment environment.

History has shown that similar events from the past have seen positive equity market returns in the three-month periods following their conclusion. While this may evolve from the current scenario investors should anticipate higher levels of volatile market movements along the way. While we remain vigilant and cognizant of the risks associated with this type of environment, we are simultaneously looking for prospective opportunities as well.

Source: BTC Capital Management, Bloomberg L.P., FactSet, The Conference Board
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

This document is intended for informational purposes only and is not an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of  principal. Investments are not FDIC insured and may lose value. 

Jon Augustine, CFA, Chief Investment Officer

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