Alternative investments may now be preferable to traditional stocks and bonds to diversify a portfolio, according to David Grecsek, managing director in investment strategy and research at Aspiriant, a national wealth management firm and independent financial advisor.

“Investors have to move away from traditional stocks and bonds when neither is working, and that is where we are now,” Grecsek said in an interview. “That means turning to things like real estate, alternatives and hedge funds using absolute return strategies that have been doing well. U.S. equities have been blowing away other equities, but investors still should make sure they have a decent amount of non-U.S. equities in their portfolios because having U.S. equities in the lead will not continue forever. Having defensive equities will help portfolios weather the storms” the markets are experiencing.

Growth stocks are going to come under increasing pressure, he said. A valuation-driven strategy can dampen drawdowns by limiting exposure to the most expensive and vulnerable asset classes, he said.

The obvious factor that is impacting the market is the Russian invasion of Ukraine. As far as the market is concerned, the situation is similar to Iraq’s invasion of Kuwait in 1990 and North Korea’s 1950 invasion of South Korea, Grecsek said in a white paper.

“For the former, the S&P 500 index dropped 17% over a period of 70 days; and for the latter it fell 13% over a period of 23 days. We wouldn’t be surprised if the current market decline runs a little deeper given Russia’s key role in energy and agricultural exports, a global economy already struggling with inflation, and central banks having much less flexibility to respond,” he said.

The factor that makes this war action worse is that Russia is a major producer and exporter of several commodities that are important to the global economy, including oil, Grecsek said. “Given the existing tightness within commodity markets, this is an environment where even modest supply disruptions can have outsize impacts," he said. "This remains a key inflation, and possible recession, risk for the global economy and is something the Federal Reserve will carefully monitor.”

In countries beyond Russia and Ukraine, including the U.S., the impact of the invasion will remain unpredictable. The pressure is greatest within Europe, but issues such as inflation will be impacted around the world, Grecsek wrote.

“While unpredictable, it is important to monitor factors such as China’s response and support for Russia, internal reaction within Russia, Europe’s ability to withstand the pressure, government sanctions, and the risk to the overall supply chain of food and energy,” he said in the whitepaper.

As far as particular market sectors are concerned, such things as information technology and consumer discretionary spending are going to see headwinds; while financials, industrials, consumer stables and health care will be more reasonably priced  and see fewer headwinds, he said.

A key consideration for the market and for consumers is inflation, he said. “It looks like the Fed will move to address inflation and, if it turns out that we see the peak in inflation in the next couple of months,” we also will see more favorable conditions for equities.

“All eyes are on the Federal Reserve Board to see what moves it makes,” he said. “I can’t remember a time when we had so much going on, but one thing that surprised us was how resilient the market has been. As with many geopolitical events, we are confident that long-term investment opportunities will present themselves in the months ahead as the situation continues to unfold. Until then, we patiently, yet earnestly, wait for the turbulence to subside.”