War, for those embroiled in one, is mankind at its worst. While the carnage of Russia’s invasion is horrendous and deplorable, the odds are that the conflict’s ill effects won’t harm the U.S economically—and by extension, shouldn’t pull down the stock market too badly.
The biggest problem likely is oil. Last week, oil prices briefly shot up to $104 per barrel, then fell back to $98 per barrel for Brent crude (the international standard) and to $100 then retreating to $92 for West Texas Intermediate (the U.S. benchmark), aka WTI. That’s largely because President Joe Biden didn’t slap sanctions on Russia’s energy output—crimping that would really hurt Europe, as well as Russia.
Indeed, there’s a chance that Russian oil exports could be curtailed, perhaps to punish the West. That is unlikely, however. Oil and natural gas, which make up 15% of Russia’s gross domestic product, are too important a source of its national income. Besides, if Moscow turned off the energy spigots, Saudi Arabia surely would leap in to make up the difference.
That said, the course of a war is seldom predictable. The invaders are meeting some stiff Ukrainian resistance, and armed conflicts always run a chance of spinning out of control and spreading. Given that X factor, J.P. Morgan’s economics research team, which Bruce Kasman heads, believes that Brent will rise to $110. At least, that’s a more welcome forecast than JPM’s previous one, $150.
As things stand, U.S. inflation already is running hot, and the Federal Reserve shows no sign of backing off its plan to crank up interest rates to tamp down that condition, starting at the central bank’s mid-March meeting. Oil is a major contributor to the inflationary ascent. WTI already is way higher than its $20 Covid low, in 2020, and also from the $40 to $60 band it traded at for several years before that.
Eerily, the recessions over the past 50 years all were preceded by spiraling oil prices, as Nick Atkeson and Andrew Houghton, of Delta Investment Management, point out in their latest newsletter. Recessions in 1974, 1980, 1990 and 2008 followed jumps in oil prices. The risk always is that, to pull down inflation, the Fed will go too far.
In straight economic terms, chances are the Kremlin’s incursion won’t have much of an effect on the U.S. As Atkeson and Houghton note, the Russian economy is just 1.7% of global GDP. Ukraine’s economy comprises an even smaller slice, some 0.03%. The U.S., with the globe’s largest GDP, is 16%. The European Union, 14%.
War only really affects the U.S. if it is a combatant. Chief example: World War II, commencing at Pearl Harbor, where Japan smashed a large part of the U.S, Pacific fleet on Dec. 7, 1941. The first day stock decrease was 3.8% and the total fall was 19.6%, reached some five months later, according to LPL Financial’s chief market strategist and historical statistician, Ryan Detrick. That was when America, despite several defeats, showed that it was seriously gearing up to wage war.
Then came a year-long climb to return to its previous high. Shortly after the market low point came the U.S. Navy’s victory in the Battle of Midway, June 1942, the turning point of the war in the Pacific.
Similar timelines occur for the First Gulf War, with a total fall of 16.9% from when Saddam Hussein invaded Kuwait in 1990, bottoming after 71 days and recovering after 189. By then, the Iraqis were defeated. After 9/11 in 2001, the market lost 11.6%, with a nadir at 11 days and a recovery after 31. By then, the U.S.-backed Northern Alliance had overthrown the Taliban in Afghanistan, where the terrorists had planned the attacks.
Few think American will join the Ukraine fighting. Biden has ruled out a military role for U.S. forces. If so, stocks should benefit. Late last week, the S&P 500 bounced back from its initial shock over the invasion, finishing Friday up 1.2% for the five days.
“We’ve likely seen the bulk of the selling pressure play out already,” says Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers. ”Historically, incursions and military escalations follow the playbook of sell the build-up, buy the invasion. In other words, the classic ‘sell the rumor and buy the news’ strategy.”