Seeing you again after a two-week break, I would have sincerely wanted to present you with a technical case study or some tips for preparing your tax return. However, with the conflict in Ukraine, my last columns on subjects such as RRSPs or salary insurance now seem to me, with hindsight, too technical, even superficial. I humbly confess to you that I wanted the Russian President, Vladimir Putin, to back down, but since the invasion continues, let’s see together if there are concrete impacts that should be taken into account in the management of your personal finances.
The invasion of Ukraine is making life difficult for riskier assets, such as equities. Since no one likes the uncertainties associated with acts of war, you probably have some legitimate fear about the future. It is therefore necessary, in a very rational way, to stick to the facts. History shows us that conflicts rarely have long-term impacts on markets. Past data indicates that regardless of what triggers a crisis, a strong recovery sets in within a year or two of the crisis.
For example, the Dow Jones industrial sector index (US$) posted a return of 23.6% one year after the start of the Gulf War, in August 1990. And this return climbed to 31.3% two years later. . One year after the 2003 invasion of Iraq, the index’s return was 29.9%, and it was 34.7% after two years.
In the case of the attacks of September 11, 2001, however, the recovery was longer, with a return of 2.9% of the same index two years after the market collapse.
In addition, we know that the S&P 500 stock index varied negatively during the periods preceding the geopolitical and military events that took place between 1939 and 2014. The average decline in the index was 1.5% three months before a conflict, while this one was up 3.7% on average three months after the events. The unknown datum here is therefore the duration of the conflict. The longer it is, the longer the recovery could take. However, remember that although we have no certainty about the duration of a geopolitical conflict and its impacts on the markets, history shows that following the plan and investing for the long term remains a winning strategy. .
The effects of different economic pressures
The rising price of gasoline at the pump is exacerbated by the political and economic pressures currently exerted on Russia. Moreover, the conflict is also pushing up the price of commodities, increasing inflation, which was already on its way to setting in as a result of the pandemic. The effect is therefore direct on your personal budget. If you have not already done so, it is imperative to review it and adjust your discretionary expense items according to the adjusted cost of living.
The objective here is to ensure that you are in a sound financial position should the conflict escalate and the global economic situation should be further affected. In concrete terms, this means avoiding indebtedness, since the fight against inflation will inevitably lead to consecutive interest rate increases over the coming months. In addition, controlling your expenses will provide you with the cash required to continue or accelerate your habit of long-term investing.
The test of values
Practically all sectors of activity have been falling since the beginning of the year on the stock markets… Except that of non-renewable energies.
So if, like me, you have in recent years prioritized certain responsible investment funds favoring clean energy or excluding fossil fuels, certain funds in your portfolio may have performed below the MSCI index, which includes companies in the energy having obtained significant returns in the context of the conflict between Russia and Ukraine.
However, I caution you against the temptation to invest in oil today, as the price is influenced by geopolitical events rather than by companies. In the long term, the rise in energy prices should, on the contrary, encourage renewed interest in renewable energy companies.