Thoughts on Global Conflict
Like many around the world, we have watched with growing revulsion the tragedy unfolding in Ukraine and we extend our sympathy to those affected. The eruption of an aggressive land war in Europe had been unthinkable in the post-Cold War era.
We are hopeful that a unified and forceful response will not only bring Russian aggrandizement to heel but will serve as a deterrent to other dictators contemplating unilateral actions that violate international law. Finally, while the world is justifiably focused on the scale of human misery caused by the war in Ukraine, we must reflect upon other conflicts in more distant parts of the world that have been equally or more costly in terms of blood and treasure.
Strongmen throughout history have relied upon armed conflict against real or imagined national threats as a means to deflect attention away from domestic problems. In addition to a pronounced crackdown on civil liberties across the Russian Federation, leadership has managed the economy poorly, with GDP contracting 25% over the past ten years.
Today, the Russian economy is tiny, representing just 1.7% of global production. While the country’s share of exports, particularly to the European Union and concentrated in the energy sector is more significant, U.S. imports of Russian oil accounts for just 3% of total domestic consumption.
As such, we believe that the economic impact of this conflict will be short lived. Rising oil prices have already prompted prognosticators of doom to predict oil prices north of $200 a barrel in the near-term with concomitant forecasts of demand destruction, cost-push inflation and recession.
However, while the importance of oil not only as an energy source but as a production input needed to produce a wide range of products is undeniable, the weight of crude oil in overall economic activity has diminished dramatically. In 1980, it took two barrels of oil to produce $1,000 in GDP, today it takes just half a barrel. Between 2010 and 2014, black gold sold for around $100 before bottoming out at $43 in 2016; neither the ill effects of elevated prices nor the tailwind one would otherwise expect from the downdraft materialized.
At the end of the day, we believe in the creative power of the American system to produce innovation that will drive productivity across large segments of our economy. Productivity gains are fundamentally deflationary. Global turmoil will - with 100% confidence - enhance the stature of the United States as a safe haven for investment capital, another deflationary tailwind. We do expect Company-specific dislocation to emerge here but not from Russia. Tolerance of dictators will likely be on the wane for at least the near- to intermediate-term, with negative implications for businesses with large China exposure.
Market averages are down between 12-20% from their recent peak with high flyers in the technology sector underperforming. With the S&P 500 Index trading at around 18 times forward earnings, we think equities remain attractive, particularly for those investors with a 24-36 month time horizon.
As always, we are grateful for the confidence you place in us as stewards of your financial well being. We have been shaken by the violence that has erupted in Ukraine and support efforts to end the conflict. From a fiduciary standpoint, our job is to articulate an investment perspective beyond the headlines and ensure that we anticipate market-moving changes that are relevant for our investors’ time horizon; notwithstanding the tragic geo-political landscape, we remain constructive.
Thank you again for your support and do not hesitate to reach out to us if you’d like to schedule a call to discuss further.
Sincerely,
Ed Vroom
Adele Weisman
Christopher E. Vroom, CFA, CFP®