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“I take the market-efficiency hypothesis to be the simple statement that security prices fully reflect all available information.”

Eugene F. Fama – University of Chicago Economist and Nobel laureate

Ukraine Invasion

On the evening of February 24, 2022, the world watched as Russia invaded its neighboring country, Ukraine.  The invasion, considered the largest conventional military attack in Europe since World War II, has devastated several Ukrainian cities and caused a humanitarian crisis, as more than 4.2 million Ukrainians have fled the country.  Russian President Vladimir V. Putin put his nuclear forces on alert, while the U.S. and its allies imposed severe economic sanctions on Russia. 

Staying the Course through Geopolitical Events

Meanwhile, the financial markets hit a correction, down 10.3% from early January 2022 highs.  This was the 33rd correction for the S&P 500 since 1950.  However, the S&P 500 has gained over 7% since Russia invaded Ukraine, through the end of the quarter on March 31, 2022.  This is a good example of why we recommend staying invested for the long term rather than attempting to time the market.  According to LPL Research, the vast majority of geopolitical events, going back to World War II, did not significantly impact stocks adversely, with any losses made up quickly.  Also important, history shows that 12 months after the event, the market is typically edging higher.

Over the last 35 years there have been four major Black Swan events:

  1. 1987 crash, also known as Black Monday
  2. September 11th terrorist attack in 2001
  3. Global financial crisis in 2008
  4. COVID-19 pandemic in 2020

With the benefit of hindsight and knowledge of past crises, hopefully you are more inclined to view them as short-term market events.  Remember, it’s not a market of stocks.  It’s a market of companies.  Great companies weathered the crises, regrouped, and went on to reach new heights.

The Markets Aren’t Crazy, but People Can Be

A recent New York Times article entitled, “The Markets Aren’t Crazy, but People Can Be” (published on March 6, 2022) provides interesting insights from Eugene F. Fama, the University of Chicago economist and Nobel Prize winner widely known as the father of the efficient-markets theory.  His theory is that markets contain all available information, which they always try to process as efficiently and rationally as possible and turn into prices.

Fama was interviewed in the midst of the stock market volatility as Russia attacked Ukraine.  He told the reporter, “It’s terrible what’s happening in Ukraine.  But the markets are behaving rationally.  It’s Putin who is irrational.”  He continued, “Markets can be rational without politics being rational or people always being rational.  The problem with pricing is a question of how much is knowable right now.”

What Actions Should I Take?

Although you may think the markets seem irrational, Fama’s response is, “What may look like craziness is really just the markets attempting to evaluate information they can’t entirely digest.”  There is so much uncertainty that leads to speculative prices, as we have seen recently in commodities and oil prices.  It’s easy to overreact to headlines and let your emotions dictate decision-making.  Our advice is to stick to your financial plan and stay the course.  We have designed well-diversified, stress-tested portfolios that align with your long-term goals. 

We should embrace the fact that we do not know how the Ukraine crisis will be resolved.  No one does. That is why we must seek rationality under uncertainty.  Remember there’s abundant liquidity in the financial system.  The personal savings rate is healthier than it’s been in over 40 years.  Unemployment is currently at 3.6% and is reaching new lows.  This is the opposite of the Global Financial Crisis when banks had zero excess reserve and the average consumer was leveraged in debt.  What we need now is rationality under uncertainty.