What’s at Stake for Investors as Ukraine Burns?

In the end, the market will focus on earnings.

By Peter Mallouk

More than a month after Russia’s military invasion of Ukraine, with markets rocked around the world; it’s natural for investors already deciphering the impacts of inflation and higher interest rates to ask: What happens to the investment landscape under the most likely scenario that involves an occupation or regional war? 

As expected, energy prices soared upon news of the invasion. Russia is a key energy producer, and as it faces steep economic sanctions, we can expect energy supplies to contract while demand remains high. Energy prices are already higher than normal due to a global surge in demand coupled with supply-chain issues.

A prolonged crisis can create a spike upwards (even from these elevated levels) of not just oil companies but clean-energy companies as well, as demand for all types of energy needs to be met.

A diversified investor has significant exposure to energy in their portfolio and would see a lift from these investments.

But what about the rest of that same portfolio? Generally speaking, we would expect some weakness across a diversified portfolio, as markets price in a chance that the conflict could spread. If the market expects a potential global war, as it did after 9/11, it adjusts accordingly (by dropping a lot). If it expects things to remain relatively under control, it will soften a bit and adjust as new information unfolds.

What does history tell us? The history paints a clear picture. The market prices in potential downside, but then does what it always does: recovers and moves on, and often it does so relatively quickly. The chart below illustrates how the market has reacted to various military conflicts and terrorist events and how long it took to recover.

Now, while the news likes to focus on one main issue and its impact on the market, the reality is there was a lot going on in the markets before Russia invaded Ukraine, and there is still a lot going on. From rising interest rates to high inflation to near-record low unemployment, the markets are absorbing large amounts of information every minute of every hour of every day.

In the end, the stock market only cares about one thing: the future earnings of companies. The market will look at this crisis and ask itself if companies like McDonald’s, Apple, Nike, and Google are likely to make more money a few years from now than they do today. If the answer is yes, the markets will work themselves out.

Standing alone, this military event is not likely to make a long-term difference to the disciplined investor. Under some scenarios, there may be opportunities that present themselves, or the market may just move on and focus on other things. 

Postscript: The bigger issue—for the mar-kets and the world—is China, who, with its eye on Taiwan, is watching very carefully. But that’s a topic for another day, one hopefully not in the near future.

About the author

Peter Mallouk is president of Creative Planning, a wealth-management firm in Overland Park, Kan., and a member of the 40 Under Forty Class of 2007.

E | mallouk@creativeplanning.com