Global markets usually weaken as wars approach, strengthen long before wars end and treat human calamity with breathtaking indifference.
That’s been a common historical pattern, anyway. And, with some important caveats, it seems to be playing out with Russia’s latest aggression toward Ukraine.
President Vladimir V. Putin of Russia has already rattled stock, bond and commodity markets around the world. On Tuesday, U.S. stocks stumbled, with the S&P 500 falling 1 percent, into what Wall Street calls a correction — a decline of least 10 percent from the most recent high.
The escalating conflict has shifted the value of mutual funds and exchange-traded funds in millions of retirement accounts, even for people who have not thought deeply about Eastern Europe and who have never invested directly in oil, gas or other commodities.
Mr. Putin’s announcement on Sunday that he was recognizing the sovereignty of two Russian-dominated breakaway Ukrainian regions and ordering Russian troops represented a serious increase in the risks of a much wider war.
Where the conflict may be heading exactly isn’t clear, but the short-term market implications are. “The near-term consequences for markets are relatively simple,” said Claus Vistesen, chief eurozone economist for the research firm Pantheon Macroeconomics. “Energy prices will keep rising, and equities will keep falling.”
Pockets of profit
Not all stocks have been falling, of course. Rising oil and gas prices have bolstered the S&P 500’s energy sector, the best performer this year, with a return of 21.8 percent through Monday. This came even as the overall index, which often serves as a proxy for the entire stock market, has fallen 8.8 percent.
Energy companies like Halliburton, Occidental Petroleum and Schlumberger are leading the S&P 500. And American investors have nearly $140 billion stashed in commodity E.T.F.s, mainly those focused on energy, like the $35 billion Energy Select SPDR Fund, which has returned 23.4 percent through Monday.
But the overall stock market has been afflicted by multiple troubles: fears of rising interest rates, sizzling inflation and continuing supply-chain bottlenecks. Russian threats to Ukraine are likely to whipsaw the market further.
Even so, long-term investors with well-diversified portfolios of stocks and high-quality bonds — whether held directly or through low-cost mutual funds and exchange-traded funds — will probably be able to ride out this crisis, as they have so many others.
While stocks often fall amid global turmoil, U.S. Treasury bonds tend to rally as investors seek havens and drive up their prices. Bond prices and yields move in opposite directions, and because interest rates are rising, Treasuries have declined in value this year. But in a major stock downturn, they usually provide a short-term buffer for portfolios that contain them.
Riding out a storm in the stock market has been a good strategy over the long term. One year after the 1941 bombing of Pearl Harbor in 1941, the S&P 500 gained 15 percent. A year after the U.S. invasion of Iraq in 2003, it was up 35 percent. History shows that just one year after most stock-market-shattering crises, the S&P 500 stock index has risen.
The stock market during the Cold War
The Russian hostilities in Ukraine could be the start of something much bigger: a geopolitical shift that plunges the world into a 21st-century version of the Cold War. But even if that’s the case, the hard numbers suggest that the financial implications for prudent, diversified investors who live far from immediate danger zones may not be all that severe.
The Cold War was destructive and debilitating for vast populations, but it was an excellent period for stock investors. Even during recessions and regional wars, the Dow Jones industrial average turned in an outstanding performance.
Here are the numbers, which I calculated over the long Presidents’ Day weekend:
From President Truman’s March 17, 1948, speech to Congress criticizing what he called the Soviet Union’s expansion of Communism in Eastern Europe, until Dec. 31, 1991, when the Soviet Union ceased to exist, the Dow returned 10.05 percent, annualized. In the roughly 30 years since then, through Friday, the Dow returned 10.77 percent, annualized, a bit better than during the Cold War, but not by much.
The immediate market effects
The price of oil is already steep: approaching $100 a barrel, from about $65 a year ago. It is likely to soar higher, especially if Russia mounts a full-scale invasion and, in return, faces harsh financial sanctions by the United States and its allies.
Oil prices are already painful for consumers. They are reflected in the most salient marker of inflation in the United States, the cost of gasoline, which already averages $3.53 a gallon, according to AAA. Inflation is already 7.5 percent, a 40-year high in the United States.
As Caroline Bain, chief commodities economist for the research firm Capital Economics, wrote on Feb. 16: “Much would depend on whether Western sanctions are placed on Russian energy companies and/or Russia decides to withhold energy supply to the West.” In a worst-case outcome, she said, “oil and gas prices could easily double temporarily and the impact on gas prices could last for longer.”
That said, Capital Economics and many other analysts view so severe an outcome as unlikely. Even if energy prices continue to spike — largely because of speculation in financial markets — they are likely to decline quickly, based on fundamental supply and demand, said Edward L. Morse, global head of commodities research at Citigroup and a former deputy assistant secretary of state for international energy policy.
He said it was unlikely that there would be a significant, long-term “disruption in supply of Russian oil or natural gas,” essentially because cutting off the flow of Russian exports is not in the interest of either Russia, European consumers or the United States.
Understand How the Ukraine Crisis Developed
How it all began. Antagonism between Ukraine and Russia has been simmering since 2014, when the Russian military crossed into Ukrainian territory, after an uprising in Ukraine replaced their Russia-friendly president with a Western-facing government. Russia annexed Crimea and inspired a separatist movement in the east. A cease-fire was negotiated in 2015, but fighting continued.
Russia’s interests in Ukraine. Russia has been unnerved by NATO’s eastward expansion and Ukraine’s growing closeness with the West. While Ukraine is not part of the European Union or NATO, it receives financial and military aid from the United States and Europe.
How the recent tensions began. In recent months Russia has built up a military presence near its border with Ukraine. U.S. officials say they have evidence of a Russian war plan that envisions an invasion force of 175,000 troops.
Failed diplomatic efforts. The United States, NATO and Russia have been engaged in a whirlwind of diplomacy to prevent an escalation of the conflict. In December, Russia put forth a set of demands, including a guarantee that Ukraine would never join NATO. The West dismissed those demands and threatened economic consequences.
The U.S.’s role. In February, the United States began warning that a full-scale invasion might be days away. Some 8,500 American troops have been placed on “high alert” for possible deployment to Eastern Europe, though President Biden has made clear that the United States would not send troops to fight for Ukraine.
Moscow asserts its power. On Feb. 21, President Vladimir V. Putin of Russia signed decrees recognizing two pro-Russian breakaway regions in eastern Ukraine and ordering troops to carry out “peacekeeping functions” in those areas. In an emotional speech announcing the move, the Russian president laid claim to all of Ukraine as a country “created by Russia.”
What is next? Mr. Putin’s actions appear to be laying the groundwork for wider intervention in Ukraine. But the economic damage of Western-imposed sanctions, and the death toll of a war, might be too great a cost for Moscow to stomach.
Mr. Morse projects a decline in oil prices by the end of this year to less than $65 a barrel, with extra supplies probably coming from Iraq, Venezuela, the United States, Canada and Brazil. And a U.S.-Iran diplomatic deal could add more than one million gallons a day.
If the Federal Reserve and other central banks go ahead and tighten monetary policy to curb inflation, the economy will cool off, reducing demand for energy, all of which would add to the momentum of a reduction in energy prices, Mr. Morse said.
Hedge your bets
The economic damage caused by the conflict could spiral in unexpected ways. “The biggest danger, of course, is the unintended consequences that we’re bound to see,” Mr. Morse said.
Russia isn’t just a heavyweight in energy production, where it ranks third in petroleum (behind the United States and Saudi Arabia) and second in natural gas (behind the United States), according to the U.S. Energy Information Administration.
It is also one of the world’s most important producers of minerals and metals like platinum, nickel, aluminum cobalt, copper and gold and diamonds. Prices of these commodities have been rising, but that’s the least of it. Shortages of Russian commodities could cause further supply-chain bottlenecks in the United States.
Russia ranks No. 1 in production of palladium, for example, a critical component of the catalytic converters required to reduce emissions in gasoline-powered cars, whose rising prices have already contributed to a surge in American inflation. Much of Russia’s palladium is mined by Norilsk Nickel, which could be included on Western sanctions lists.
On Tuesday, Chancellor Olaf Scholz of Germany put a stop to the Nord Stream 2 natural gas pipeline linking Germany to Russia. But it will be challenging for policymakers to calibrate further sanctions and monetary policy in a manner that satisfies Western geopolitical objectives without damaging the global economy.
Economics aside, Russia’s grievances with the West have already led to a partial rapprochement with China. If that evolves into a strong alliance, it would shift the balance of global power in a direction that generations of Western strategists have tried to prevent.
“This crisis is a trip back to the future,” Ian Bremmer, president and founder of the risk consultancy firm Eurasia Group, said in a video conversation from the Munich Security Conference last week. Russia’s actions have moved the world closer to a great-power military conflict than at any time since the end of the Soviet Union.
The possibility of a confrontation between NATO forces and Russia, with its nuclear arsenal, raises the risks of the Ukraine crisis beyond rational calculation.
Even so, the markets will perform those calculations anyway.
History tells us that the worse things get, the more valuable cash and Treasuries seem. And it also says that Cold Warriors who stuck with the stock market ended up with big fat portfolios.
That’s likely to be the case in the future, too. But it’s impossible to be certain of it.