Rising oil prices 'the biggest concern from an economic standpoint,' strategist says

Verdence Capital Advisors Chief Investment Officer Megan Horneman joins Yahoo Finance Live to discuss the state of the stock market as the Russia-Ukraine war intensifies.

Video Transcript

BRIAN CHEUNG: A Russian convoy over 40 miles long approaching Ukraine's capital, and Secretary of State Antony Blinken calling out the Kremlin for killing civilians in Ukraine. Earlier today, he told the UN Human Rights Council that the Russian military is striking schools and hospitals. Let's zoom in on the impact of the economic sanctions and also take a look at the market implications as global stocks and bond yields move with Meghan Horneman, Vernon's Capital Advisors Director of Portfolio Strategy.

Megan, it's great to have you on the program this afternoon. Obviously, a lot of movement happening in markets right now. You know, the 10-year yield catching my eye-- I mean, you do not see these 15 16-basis point move on the long end here. What's going on here? Are markets starting to kind of grasp the gravity of what's going on in Eastern Europe?

MEGAN HORNEMAN: I think it's just your traditional flight to safety. And today, it looks like the markets are getting hit a bit harder, more violent swing as the aggression with Ukraine does intensify. So I think what you're seeing is a flight to safety. And right now, unfortunately, the one place in the world where people are looking to go is into US dollars, into US treasuries.

BRIAN CHEUNG: So when it comes to just kind of the overall global picture, I mean, you know, a lot of people were saying over the last week or so in our conversations that, yeah, the Russia-Ukraine situation is a geopolitical risk, but that, historically, markets have just seen it as a speed bump-- that the bigger story right now is the Federal Reserve. When you take a look at market action like today, do you hold to that theory? Or do you feel that maybe it is, indeed, something that the geopolitical risk could be a bigger deal than markets were discounting?

MEGAN HORNEMAN: I definitely understand the geopolitical risk has intensified lately and we have transformed from where there is just the overall fear of what the Federal Reserve was going to do. That's translated now into what's going on from a geopolitical sense. So right now, there's really some price discovery going on.

People are trying to figure out from an earnings perspective what higher energy prices will mean. They're looking at the sanctions trying to get a gauge of what that means for global growth. But at the end of the day, geopolitical risks, as you had mentioned, they do tend to be short-lived. The biggest impact right now is just the very, very significant move higher we're seeing not just in oil here, but in Brent as well overseas. This is the biggest concern from a economic standpoint.

So while you can look at portfolios and kind of look past the short-term geopolitical risks, you do have to look at, is it threatening the economic fundamentals? So markets and investors are getting nervous that higher energy prices can impact economic growth here in the US and abroad.

BRIAN CHEUNG: Now, when we talk about just kind of positioning that in this case, how are you thinking about the way to hedge against what is higher volatility across the board here?

MEGAN HORNEMAN: Well, having some dry powder, having some cash is always important as well. We knew that coming into this year that there would be volatility-- not necessarily from as high as it is because of the geopolitical situation, but because of the Federal Reserve and the fact that we were maturing in the economic cycle and did expect an economic slowdown this year. So having dry powder is important.

But in periods like this when it's very, very challenging to kind of stomach those daily violent swings, as well as look at the very tragic humanitarian crisis that's going on in Ukraine, it's important not to let emotion override your long-term objectives with your portfolios. Also, it's important to be well diversified.

Coming into this year, no one wanted to touch bonds at all. And we don't necessarily like bonds for the long run either. But it does show you in periods like today and the past couple of weeks that bonds do serve as a purpose of a portfolio diversification. You need to be well diversified. Over the long run, if you have a well-diversified portfolio, that should withstand over the long run as short-term periods of volatility, driven by exogenous factors like what we're seeing from a geopolitical standpoint.

BRIAN CHEUNG: I mean, I guess on that point, if the thesis here is to kind of ride it through, what was interesting was that throughout a lot of 2021, the big story was get into risk, because that's the only place where you can find yield right now. Now, for people that may be picked up, let's say, for example, emerging market funds looking for yield in the midst of 2021, is it still the case and the recommendation to kind of stay the course through all of this?

MEGAN HORNEMAN: It's very important when it comes to those areas that are most affected to know what you own. So holding an index fund, for example, that is in Russia or a part of the emerging world that's highly exposed to Russia, that's not going to give you the benefits of an active manager that can pick apart what companies can get through this. I wouldn't add anything right now from a perspective of overall asset allocation.

Emerging markets do have a place in portfolios. But know what you own. That's the most important thing. At this time right now, we're still in that buy on dip mentality, but we're being very selective on where we're looking to do that. Areas in the US market right now are a little bit more insulated from an overall-- you know, the global situation that we're dealing with right now-- small and mid-cap areas, these areas should be a bit more isolated than some of your US large cap areas as well.

So just know what you own. I wouldn't necessarily add into the emerging markets. Be very defensive. Be patient. Look at each pullback and assess, has it changed the underlying economic fundamentals? And then make decisions from asset allocation.

BRIAN CHEUNG: Know what you own. Megan Horneman, Vernon's Capital Advisors Director of Portfolio Strategy, thanks so much for stopping by this afternoon.