Economic Impact of War in Ukraine
Apr 1, 2022
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Let’s begin with a very important statement about markets. Although markets can be irrational or have emotional knee-jerk reactions, at their core they are processing machines, devoid of feeling. It is their job to sift through what is happening in the world and then assign prices accordingly. In that sense, they’re much like an actuarial deciding if you are a worthwhile investment to offer life insurance. When wars break out, it is the job of a market to not focus on the devastating humanitarian crisis and only focus on the economic impact. And based on current prices, it would appear markets are not assigning much economic value to the war in Ukraine.
In the days leading up to Russia’s invasion of Ukraine, markets sold off and after a short bounce, continued selling off. However, since March 8th, the S&P 500 has risen from a low of 4158 to nearly 4600. Volatility has fallen from a high of near 38 to just over 20. Put differently, the market has essentially concluded the economic consequences of this particular war are no worse than the regional conflicts constantly taking place around the world that get little to no media coverage.
It’s not only a valid question but a necessary one to ask why markets have rebounded the way they have. It is not just U.S. equity prices that rebounded, but so too has the Russian ruble which has recouped some 50% of its initial devaluation.
A big part of the answer seems to rest with the willingness of nations, other than the U.S. and those in Europe, to continue doing business with Russia. From China to Mexico, a significant number of countries have decided to look the other way or at a minimum, put economics ahead of humanity. Another part of the answer rests with the sanctions imposed on Russia not including their biggest export of oil. While sanctions have taken their toll on many Russians, the lack of sanctions on oil have allowed their economy to stabilize.
There is also an argument to be made with respect to efficiency. It’s entirely possible the market has looked at the situation in Ukraine and priced in any potential outcome. Afterall, that is what markets are supposed to do. Markets should err on the side of characteristics more aligned with a sociopath than being highly emotional.
Make no mistake, the war in Ukraine is awful. It’s stomach churning and exemplifies the absolute worst in humanity. At the same time, trying to understand and articulate why markets do what they do is not only our occupation, but our obsession. And if you’re trying to wrap your head around current prices, it’s tough to say the market hasn’t simply categorized Ukraine as just another regional conflict.
Written by Dylan Ratigan and Josh Fabian
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Mar 9, 2022
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