Volatility Returns as Crisis in Ukraine Creates Uncertainty
Most investors have most likely never even heard of Ukraine prior to the last two weeks. Now the future of Ukraine and potential repercussions on other countries in the region appear to be at the forefront of investor minds across the globe. Overall, Ukraine is a relatively small country in Eastern Europe with a population of about 46 million people that borders the likes of Russia, Belarus, Poland, Slovakia, Hungary, Romania and Moldova. Not known for much outside of fertile farm grounds, Ukraine was thrust into worldwide headlines when it removed its President on February 22, largely in response to mass, ongoing but intensified anti-government protests in the country that left many dead or wounded. Russia decided to step in with its military to purportedly protect its citizens residing in Crimea (one of the regions of eastern Ukraine), but many fear that this action may be an attempt by Russia to potentially take control of the region entirely and the start of a more wide reaching military campaign.
Region in Conflict: Crimea
Source: Map of Ukraine. www.lonelyplanet.com
While it is not clear what will happen next in Ukraine and if the crisis will escalate into a larger scale international event, it is clear that some investors are nervous. As a result, volatility has returned to the stock market. As the market closed on March 3, the Dow Jones Industrial Average (DJIA) declined nearly 154 points for the day, representing an approximate 1% daily drop. Losses were more severe in other asset classes and sectors of the market though as seen through certain well-known Exchange-traded funds (ETFs). For example, International Emerging Market Equities, as represented by the iShares MSCI Emerging Markets ETF (Ticker: EEM), finished down nearly 2% for the day and International Developed Market Equities, as represented by the iShares MSCI EAFE ETF (Ticker: EFA), lost over 2% for the day. Most other major equity asset classes and sectors followed suit with the “risk off” market retreat while bond market and non-traditional/alternative asset classes such as Precious Metals, Gold and Silver, Agricultural Commodities, Energy Commodities and Real Estate Investment Trusts (REITs) appeared to be some of the benefactors of this short term volatility.
This recent market volatility, which may prove to be shorter term in nature than some currently fear and is the second significant crisis in the Emerging Markets already this year, should serve as a reminder of the importance of asset allocation in a properly constructed growth portfolio. Asset allocation remains of the upmost importance, from our point of view, and should always be constructed in accordance with one’s investment objectives, investment timeframe and tolerance for risk. While past performance cannot guarantee future results and asset allocation cannot ensure a profit or protect against a loss, applying a historical perspective and maintaining an appropriate strategic asset allocation can help provide comfort and direction to investors during periods of great volatility – whether these periods are short term or long term.
Investors would be wise to look for areas of low correlation in non-traditional asset classes and sectors in an effort to not only provide for additional diversification but also to help find additional pockets of risk-adjusted growth potential in 2014.
Disclosure: The information provided is for educational purposes only and should not be misconstrued as a solicitation to purchase or sell any of the securities mentioned. Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the investment themes cited above.