What a difference a week - and a war - makes.
In the past 5 trading days, the CBOE Volatility Index (VIX), also known as the market’s “fear index,” is up over 50% and is now beyond the 32 level. Crude oil is up over 40% to more than $100 a barrel. And total nonfarm payroll employment fell by 92,000 for the month of February.
Mix all these disturbing parts together and there is little wonder why the S&P 500 fell over 2% in the past week and is signaling tough times ahead.
As a result, advisors have been engaging in a slew of conversations with clients about the impact of geopolitics on their portfolios and what, if anything, they should be doing about it.
Juan Xavier Sánchez, head of wealth strategy with Activest Wealth Management, for one, says most of the conversations he’s been having with clients end up coming back to energy. Oil is usually where geopolitical tensions start to show up in the broader economy in his view, and if energy prices remain elevated, inflation can “stay sticky” and that complicates the path for central banks.
“One area we are watching closely is the Strait of Hormuz. Roughly 20% of the world’s oil supply moves through that chokepoint, so any escalation involving Iran can have immediate implications for global energy prices. A supply shock of that size can delay rate cuts or push central banks to keep policy tighter for longer than markets currently expect,” Sanchez said.
Still, despite those conversations, Sánchez reminds his clients that the best approach is to not react to the headlines. According to Sanchez, markets have gone through geopolitical shocks during several periods of history, and even though each one is different, most of them create volatility in the short run without really changing the longer-term direction of markets.
“The portfolios we manage are spread across sectors and asset classes, which tends to be the best protection in periods of uncertainty. That said, when global tensions rise, it naturally brings more attention to areas like energy, defense, and cybersecurity, which we are looking at more closely as the situation evolves. The priority for us is staying balanced and managing overall risk,” Sanchez said.
Elsewhere, Troy Davidson, wealth advisor at Ballast Rock Private Wealth, says his conversations with clients are focused on “maintaining perspective.” Geopolitical events can create short-term volatility, but well-constructed portfolios are designed to navigate a wide range of economic environments, according to Davidson.
“A key part of our process is building and continually updating each client’s financial plan. Our planning models run thousands of simulations to stress test portfolios under different scenarios, including higher inflation, shifting interest rates, and market downturns. If inflation proves more persistent, we may rotate toward asset classes and sectors that historically perform well in inflationary environments,” Davidson said.
Davidson adds that the key to success is building customized portfolios designed to withstand periods of volatility and geopolitical uncertainty. Once those structures are in place, he can make thoughtful tactical adjustments when market conditions shift.
For example, rising oil prices tend to create inflationary pressure, which can benefit sectors such as energy, materials, and commodities, so he may modestly overweight those areas while emphasizing quality and value-oriented companies. At the same time, he may reduce exposure to sectors that are more sensitive to higher energy costs, such as certain consumer discretionary or transportation businesses.
“Importantly, we avoid making large reactionary changes based on short-term headlines. Instead, we make disciplined, incremental adjustments designed to protect and grow client wealth over the long term,” Davidson said.
WHAT ABOUT THE SPENDING SIDE?
When it comes to spending during what may turn into a uncertain economy, Activest’s Sanchez said he has not been prescribing any belt tightening yet.
“When we design financial plans we already assume markets will go through periods like this from time to time. The main focus is making sure the portfolio and the liquidity profile match each family’s situation so they are not forced to react to short-term market swings,” Sanchez said.
Similarly, Ballast’s Davidson says that if a plan is built properly, it accounts for variables such as market volatility, inflation, spending needs, and portfolio withdrawals. For clients who are drawing income from their portfolios, he often recommends structuring withdrawals as a percentage of the portfolio rather than a fixed dollar amount. This allows spending to adjust with market conditions and helps support the longevity of the portfolio.
“We also seek to construct portfolios that generate income through dividends, interest, and other distributions, which can reduce the need to sell investments during periods of market weakness. The goal is to ensure that clients can remain confident in their financial plan regardless of short-term economic uncertainty,” Davidson said.
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