Will the Russia-Ukraine Conflict Impact the Stock Market?

Key Takeaways:

• The stock market can become volatile during times of conflict
• Stock market downturns eventually correct themselves
• History can teach us what to expect from the stock market during similar circumstances

The Russian military is on the attack. The Ukrainian military continues to defend itself. Ukrainian officials confer with the United Nations, trying to receive aid without escalating the conflict. And Russian president Vladimir Putin stays hunkered down, seemingly unwilling to give up. We’ve seen what it looks like on the front lines. We’ve watched it unravel in real time on the news and social media.

Worrying about the effects the conflict might have on the future is inevitable. But, is there a way to know what those effects might be? Can we ever truly prepare for a moment such as this?

For answers, we must first look at our own history.

The Russia-Ukraine conflict: Learning from stock market history

One of the most popular questions we are getting from clients these days is “How will the Russia-Ukraine conflict affect the United States Stock Market going forward?” As Russian and Ukrainian forces square off, many investors are wondering if war is good for markets. History has shown that while the start of a war may create market volatility that this volatility tends to be short-lived and markets then resume their regular patterns that are influenced by liquidity and money flows. When it comes to financial markets, while history doesn’t always repeat itself, it does tend to rhyme over time.

This leads us to believe the answer to the question of “How will the Russia-Ukraine conflict affect the US Stock Market going forward ” depends on where within the bull and bear market cycles a conflict may occur.

As many investors are aware, over longer periods of time, financial markets tend to ebb and flow from periods of increasing prices (Bull Markets) to periods of time when prices decline (Bear Markets). A big factor of how a global conflict like the war in Ukraine affects financial markets can be when that conflict happens within these bull and bear market cycles. For example, in March 2003, when the Iraq war began, stock markets were in the early phases of a rebound after the bear market of the 2001-2002 Dot-Com bust. Nasdaq declined over 70% during those years. Interest rates were much higher and inflation was much lower than today.

This gave the Federal Reserve a lot of room to be accommodative in creating an environment of growth. In fact, I can recall reading articles from market pundits back in 2003 that claimed inflation was dead. In hindsight, for a period, those pundits were right—and this provided The Federal Reserve a lot of cover in creating policies to help stimulate the economy during and after the Iraq war.

Now, at the current time, we seem to find ourselves on the other side of these cycles. Rather than equity markets being at lower valuations after a bear market (like they were when the Iraq War started), they find themselves at some of the highest historical valuations investors have seen in their lifetimes. In addition, interest rates are near historic lows, while inflationary pressures are at historic highs, putting the Federal Reserve in a precarious position, to say the least.

The closest historical reference we have for a time that included some similar market factors as we are seeing today, along with a global crisis, is the early seventies, when the Vietnam War was coming to an end. At that time, the U.S. government was heavily indebted from the war, supply chain issues were rampant (remember odd and even days and oil embargos?), inflation was running hot, interest rates were in the middle of rising year over year for many years, commodity and real estate markets were all the craze and the stock market was in a multiyear secular bear market.

As we mentioned before, history doesn’t always repeat itself, but it does tend to rhyme over time and may be something equity investors should consider when they ask, “How may the Russia-Ukraine crisis affect the US stock market?”

What effects will the Russia-Ukraine conflict have on the stock market?

Predicting the future is no easy task. We can, however, make educated guesses based on a wealth of knowledge from historical market data. Looking back at the end of the Vietnam War—and wartime stock market statistics in general—we can see that wars often lead to a volatile market. This makes some obvious sense: when times are uncertain, making financial decisions can become difficult.

But there are some very important lessons we can learn from the history of the stock market. For instance, some industries tend to thrive during moments of conflict. Staple goods and services, such as food production, can sometimes remain relatively steady during economic downturns. Energy, such as oil, can become a little more volatile. For the moment, oil seems profitable as prices are generally on the rise. However, no one can guarantee it will stay that way—and changes can happen fairly quickly.

The most important lesson we can learn from history is this: even when current events cause a downturn in the market, it eventually recovers. Most often, that recovery happens within twelve months. In times such as this, planning for the long-term and mitigating risks can be more important than trying to make immediate gains.

The stock market during times of conflict can become an intricate and volatile game. If you’d like to know more about what to expect or need help developing lower-risk investment strategies, consider contacting us.