The Russian-Ukrainian crisis shakes the markets, but the long-term outlook is better

Global markets usually weaken as wars approach, strengthen long before wars are over and treat human catastrophe with breathtaking indifference.

This was a common historical pattern, anyway. And with some important caveats, he seems to be playing with the latest Russian aggression towards her Ukraine.

President Vladimir Putin Russia has already rocked stocks, bonds and commodities markets around the world. On Tuesday, US stocks tumbled, with the S&P 500 down 1 percent, in what Wall Street calls a correction — at least 10 percent down from its recent high.

The escalating conflict has shifted the value of mutual funds and exchange-traded funds into millions of retirement accounts, even for people who had never thought deeply about Eastern Europe and had never invested directly in oil, gas or other commodities.

Putin’s announcement on Sunday that he recognized the sovereignty of two separate Russian-dominated Ukrainian regions and that ordering Russian troops represented a dangerous increase in the risks of a much broader war.

It is not clear exactly where the conflict is heading, but the short-term effects for the market are. “The near-term consequences for markets are relatively minor,” said Klaus Vestesen, chief eurozone economist at research firm Pantheon Macroeconomics. “Energy prices will continue to rise, stocks will continue to fall.”

pockets of profit

not all Stores The fall, of course. Higher oil and gas prices boosted the S&P 500’s energy sector, the best performer this year, with a return of 21.8 percent as of Monday. This came even as the general index, which often acts as a proxy for the entire stock market, fell 8.8 percent.

Energy companies such as Halliburton, Occidental Petroleum and Schlumberger lead the S&P 500 Index. American investors hold nearly $140 billion in commodity ETFs, especially those focused on energy, such as $35 billion SPDR Energy FundWhich is back 23.4 percent as of Monday.

but the general stock market Plagued by Multiple Problems: Fears of high interest ratessizzling economic inflation and continue supply chain bottlenecks. Russian threats to Ukraine are likely to hit the market further.

However, long-term investors with well-diversified portfolios of high-quality stocks and bonds — whether held directly or through low-cost mutual funds and exchange-traded funds — will likely be able to weather this crisis, as they have. Many others.

While stocks often fall amid global turmoil, US Treasuries tend to rise as investors seek safe haven and raise their prices. Bond prices and yields move in opposite directions, and because interest rates are rising, the value of Treasuries has fallen this year. But in the event of a major downturn in stocks, they usually provide a short-term reserve for the portfolios that contain them.

Beating the storm in the stock market was a good long-term strategy. One year after the 1941 bombing of Pearl Harbor, the Standard & Poor’s 500 Index rose 15 percent. A year after the US invasion of Iraq in 2003, it rose 35 percent. History shows that just one year after most of the crises that caused stock markets to crash, the S&P 500 stock index rose.

Stock market during the cold war

Russia’s hostilities in Ukraine may be the beginning of something much bigger: a geopolitical shift that plunges the world into a twenty-first-century version of the Cold War. But even if that were the case, the hard numbers suggest that the financial implications for prudent, diversified investors who live far from immediate danger zones may not be that dire.

The Cold War was devastating and debilitating for a large population, but it was an excellent period for stock investors. Even during recessions and regional wars, the Dow Jones Industrial Average turned out to be an outstanding performer.

Here are the numbers I calculated over the long weekend of Presidents’ Day:

From March 17, 1948 to President Truman, Speech Congress criticized what it called the Soviet Union’s expansion of communism in Eastern Europe, until the end of December 1991, when the Soviet Union ceased to exist, the Dow Jones returned 10.05 percent annually. In the nearly 30 years since, as of Friday, the Dow is back 10.77 percent, year on year, a little better than it was during the Cold War, but not by much.

The price of oil is already high: close to $100 a barrel, from about $65 a year ago. It is likely to rise higher, especially if Russia escalates with a full-scale invasion, and in turn, faces harsh financial penalties by the United States and its allies.

Oil prices are already painful for consumers. Reflected in the most prominent mark economic inflation In the United States, gasoline, which already averages at $3.53 a gallon, costs more, according to AAA. Inflation already 7.5 percent, The highest level in 40 years in the United States.

As Caroline Payne, chief commodity economist at research firm Capital Economics, wrote on February 16: “Much will depend on whether Western sanctions are imposed on Russian energy companies and/or Russia decides to withhold energy supplies from the West.” In the worst case, she said, “oil and gas prices could easily double temporarily and the impact on gas prices could last longer.”

However, Capital Economics and many other analysts see a very serious outcome as unlikely. Morse, global head of commodity research at Citigroup and a former deputy assistant secretary of state, even if energy prices continue to rise — largely due to speculation in financial markets — they are likely to fall quickly, based on underlying supply and demand. State of International Energy Policy.

He said there was unlikely to be a “significant, long-term disruption to Russian oil or natural gas supplies”, mainly because cutting off the flow of Russian exports was not in the interests of Russia, European consumers or the United States. States.

Mr Morse expects oil prices to drop by the end of this year to below $65 a barrel, with additional supplies likely to come from Iraq, Venezuela, the United States, Canada and Brazil. and Diplomatic deal between the United States and Iran It can add over a million barrels a day.

if it was Federal Reserve Other central banks will go ahead and tighten monetary policy to curb inflation, and the economy will cool down, reducing energy demand, all of which should add to the momentum of lowering energy prices, Mr. Morse said.

Hedge your bets

The economic damage caused by conflict can be compounded in unpredictable ways. “The biggest danger, of course, is the unintended consequences we are bound to see,” Mr. Morse said.

Russia is not just a heavyweight in energy production, ranking third in petroleum (after the United States and Saudi Arabia) and second in natural gas (after the United States), according to US Energy Information Administration.

It is also one of the world’s most important producers of metals and minerals such as platinum, nickel, aluminum cobalt, copper, gold and diamonds. Prices for these goods are rising, but this is the least. A shortage of Russian goods could cause more bottlenecks in the US supply chain.

Russia ranks first in the production of Palladium, for example, is a critical component of the catalytic converters needed to reduce emissions in gasoline-powered cars, the high prices of which have already contributed to increasing US inflation. A lot of Russian palladium is mined by Norilsk Nickel, which can be included in Western sanctions lists.

On Tuesday, German Chancellor Olaf Scholz put an end to Nord Stream 2 Natural gas pipeline connecting Germany to Russia. But it will be difficult for policymakers to adjust more sanctions and monetary policy in a way that satisfies Western geopolitical goals without hurting the global economy.

Economics aside, Russia’s grievances from the West have already led to a partial rapprochement with China. If this develops into a powerful alliance, it will change the balance of world power in a direction that generations of Western strategists have tried to prevent.

“This crisis is a journey back into the future,” Ian Bremmer, president and founder of risk advisory firm Eurasia Group, said in a video chat from last week’s Munich Security Conference. Russia’s actions have brought the world closer to a military conflict between the great powers than at any time since the end of the Soviet Union.

The prospect of confrontation between NATO forces and Russia, with their nuclear arsenal, increases the risks of the Ukrainian crisis beyond logical calculations.

However, the markets will make these calculations anyway.

History tells us that the worse things got, the more valuable cash and Treasuries seemed to be. He also says that the cold warriors who stuck to the stock exchange ended up with huge wallets of fat.

This will likely be the case in the future as well. But it is impossible to be sure.