‘Process Over Prediction’ in Real Time: Responding to the Unexpected

How the Ukrainian Invasion Has Changed RiverFront’s Portfolio Positioning


  • In our view, the Russian invasion sparks a huge rise in commodity prices, a stock correction, and heightened anxiety.
  • In response, RiverFront has lowered equity weightings and raised cash holdings in our balanced portfolios.
  • In times of uncertainty, we believe in following our risk management discipline unemotionally.

The situation on the ground in Ukraine has taken numerous turns – some shocking, some inspirational - in the scant time since Russia first invaded Ukraine on February 24,2022. We have witnessed Vladimir Putin brazenly target civilian areas and nuclear reactors in Ukraine in his bloodthirsty war to reclaim the territory of the defunct Union of Soviet Socialist Republics (USSR). We have also witnessed inspiring levels of unity and resilience not only from Ukraine itself, but the rest of the democratic Western order. We have seen Germany and other Eurozone countries set aside their regional rivalries and economic self-interest to sanction Russian banks, individual oligarchs and the Russian central bank, not to mention ship weapons and aid directly to Ukraine. Even Switzerland has cast aside nearly four centuries of neutrality to actively aid Ukraine in their existential battle.

Russia related disruptions in energy and agricultural supply chains (Ukraine is a major supplier of agricultural commodities), as well as the economic effect of sanctions, are having significant impacts in global markets. Last week, oil, industrial metals and agricultural commodities all hit multi-year highs (see chart, below) and the Russian Ruble touched all-time lows. Back in November of 2021, as RiverFront was laying out the major market risks we saw in the upcoming year in our 2022 Outlook , the possibility of a war in Europe notably wasn’t among them -though higher than expected inflation certainly was. Thankfully, our portfolio management process is guided by ‘process over prediction’, not on possessing a better ‘crystal ball’ than others. Our process is disciplined and dynamic, designed to assess new information quickly, and unemotionally adjusts as appropriate. To paraphrase the great John Maynard Keynes, “As the facts change, we change. What do you do, sir?”

We do not know when or how the war in Ukraine will be resolved, but we will continue to follow our unemotional, data-driven process to guide us on, if and how to both further reduce portfolio risk - crucially for long-term portfolio performance-and when and how to add stocks back into the portfolios.

Dramatic Rise in Commodity Prices Since Pandemic Lows

Source: Refinitiv DataStream/ Fatham Consulting. Data daily, as of 3/7/22 for illustrative purposes only.


Our processes have triggered risk reduction trades in our balanced asset allocation portfolios twice since the beginning of 2022. These include a comprehensive set of risk reduction trades we executed on February 25, the day after the invasion, that took us from overweight stocks relative to our policy benchmarks to roughly neutral. The trades further lowered exposure to both domestic and international stocks, raising cash to give us flexibility as we assess the market’s fundamentals and technicals. We believe opportunities to reinvest in equities will eventually emerge, but near term, sorting out inflation and geopolitics will create more headwinds than tailwinds for markets, in our opinion.

In general, RiverFront’s portfolios are now positioned in the following ways due to the risks of not only the war in Ukraine, but also how this dynamic and the labor/supply chain aftershocks of COVID-19 have complicated central bank policy:

  • Elevated cash levels: We are currently carrying elevated levels of around 9-12% of cash in our balanced portfolios:
  • Underweight international assets:
  • Underweight Mainland Europe – we believe the concentration in financials and reliance on Russian energy and complex banking relationships will lead to further downside risks in the near term.
  • Underweight Emerging Markets – our belief is that the increasing geopolitical risks from Russia and China will create several short-term corporate earnings headwinds in a large number of emerging markets.
  • Favor Energy-related securities: RiverFront has been meaningfully increasing energy and commodity-related weightings in portfolios over the last few quarters and now are neutral to overweight US energy stocks; we also prefer cyclical materials and industrials, other sectors helped in general by higher commodity prices in our opinion.
  • Using covered call strategies to help offset volatility:

We believe cash can act as a risk 'shock absorber' in a market where both stocks and bonds have been highly volatile, cash can also give portfolio managers additional flexibility – ‘dry powder’ to deploy to help capitalize on potential overreactions in stock markets.

In addition to the US – our preferred region for energy stocks - we also prefer some commodity-linked international regions that are likely winners from both heightened global inflation and political tensions. In our longer-horizon, most risk-tolerant portfolios, we have recently increased holdings in Norway, Canada, and Latin America.

RiverFront considers covered call writing an alternative strategy to owning stocks. We have been adding the strategy in recent quarters to help generate portfolio yield and potentially offset some equity volatility (See definition of covered calls in Footnotes).


While we believe corrections can be healthy, the gravity of the Russia/Ukraine situation may lead us on a different path. The conflict is unlikely to end quickly, and consequences and costs will be large – creating the need for continual reassessment. One of our tactical rules is ‘Don’t Fight the Fed’. Our recent Weekly View: The Fed Outlook is Changing laid out just how the war in Ukraine has made the Federal Reserve’s (Fed) job more difficult, as the Fed weighs the potential need to offset economic issues caused by Russia with the concerning level of inflation in commodities and goods. We believe this underscores the need to remain flexible and be able to adjust tactically where appropriate. In terms of the message of markets themselves (‘Don’t fight the Trend’), we are impressed that the S&P 500 has been able to hold above thus far what we view as important technical support at ~4200 (the 38% retracement of the Oct ’20 thru Jan ‘22 rally) since the start of the Ukrainian war on February 24. On that day, it had broken decisively below 4200 intraday before bouncing more than +4% to end the day higher.

However, the S&P is not out of the woods yet: it is still trending lower, based on this year’s pattern of lower highs and lower lows, it is 9.7% below the January 3 record high (as of 3/7/22). The S&P 500’s primary trend (the red line in the chart, below) is still positive but flattening, now at a +6% annualized run rate down from approximately 26% at the beginning of the year (see chart, below). Unfortunately, international stocks’ primary trend is now negative, falling at a -4% annualized rate.

S&P 500 and important support levels

Source: Refinitiv DataStream. Data as of 3/7/22 for illustrative purposes only. An investment cannot be made directly in an index.


Even in such a dark time, there are reasons to believe that the US market, in particular, can eventually shake off this recent volatility. Another important tactical rule we follow – ‘Beware the Crowd at Extremes ‘– is increasingly on investors’ side, as investor sentiment is now extremely bearish, based on NDR’s weekly and daily crowd sentiment polls - a contrarian plus in our view. Our proprietary ‘heatmap’ analysis of crowd sentiment combined with the primary trend’s current run rate suggests to us that, based on history, the S&P has well above average odds of being up over the next three months.

We would also note that the global economy is entering this geopolitical crisis in strong economic shape according to survey-based economic data, with Germany, Eurozone, US and UK manufacturing Purchasing Manager Indexes (PMIs) all above 57 right now.

Additionally, historical precedent over the past century warns against emotional ‘overreaction’ in investment decision making because of geopolitical events as S&P 500 is typically higher 6-12 months after the event. We show a table from Ned Davis Research[1]. We have taken this table and highlighted three potentially relevant historical cases, as we believe they all share similar characteristics to the current situation in Ukraine…in all three instances, markets were higher six and twelve months after the incident.

  • ‘Cuban Missile Crisis’, 1962: Dow Jones Industrial Average (DJIA) higher by 24% 6 months later, and 30% 12 months later
  • Iraq Invasion of Kuwait, 1990: DJIA higher by 16% 6 months later, 22% 12 months later
  • Russian invasion of Crimea, 2014: DJIA higher by 6% 6 months later, and 11% 12 months later

[1] Davis, Ned, ND, (2022) Sentiment - short-term hopeful, but long-term cautious (Issue: HOT202202231) Ned Davis Research. NDR.com

Sentiment - Short-Term Hopeful, but Long-Term Cautious

[1] Davis, Ned, ND, (2022) Sentiment - short-term hopeful, but long-term cautious (Issue: HOT202202231) Ned Davis Research. NDR.com