Geopolitical Risks Rise

Weekly Market Update | February 22, 2022

Highlights

Globally, stocks sold-off as investors digested rising geopolitical tensions at a time of elevated inflation and tightening central banks. The MSCI All Country World index tumbled 1.7% while the S&P 500 dropped 1.6% and the NASDAQ slipped 1.8%. International stocks did not fare much better with European and Japanese stocks falling by 2.3% and 1.6%, respectively. The 10-year U.S. Treasury yield was little changed at 1.93%.

On February 21, Russian President Vladimir Putin signed decrees recognizing two regions in the east of Ukraine, Donetsk and Luhansk, as independent republics and ordered Russian troops into the regions. In response, the White House announced that President Biden would sign an executive order cutting off western financing. Forthcoming sanctions could also target Russia’s banking sector, restrict access to semiconductors, and target select Russian officials.

We see a military response from the North Atlantic Treaty Organization (NATO) as extremely low. Excluding the attack on Pearl Harbor, the average S&P 500 drawdown in response to geopolitical events has been 4.7%. On average, the market recovered those losses after about one month.