Russia's Nuclear Threats Can't Keep the Stock Market Down. Here's Why. -- Barrons.com

Karishma Vanjani

The threat of nuclear war seems higher than it has in ages, but the stock market wants what wants -- and it wants to go higher.

The S&P 500 rose more than 0.5% on Thursday and is less than a percentage point away from adding to the more than 50 record highs its hit this year. While investors talk about all the reasons the stock market could blow up -- valuations are sky-high, the growing concentration of Magnificent Seven names, including Nvidia, Apple, and Microsoft, and a resurgence of inflation, among them -- there has been less talk of the actual Armageddon plain sight: Russia's war on Ukraine.

Reports emerged that Russian troops had launched Intercontinental Ballistic Missiles at Ukraine earlier Thursday morning, though it's unclear whether the missiles were actual ICBMs or something else. ICBMs have the power to traverse continents and could, for instance, strike Chicago from a base located 5,689 miles away, according to a fact sheet from the Center for Arms Control and Non-Proliferation, a nonprofit dedicated to eliminating nuclear threats.

The missiles are also designed to carry nuclear warheads, though one wasn't used in this case. If the reports are true, this would be the first time Russia has used such weapons since it invaded Ukraine in February 2022, according to AFP.

This surprise from Russia comes after President Vladimir Putin updated Russia's nuclear doctrine to allow for a nuclear response to conventional attacks on Tuesday, making the prospect of nuclear war seem plausible, if unlikely. His shift in stance followed Ukraine's recent launch of U.S.-made long-range missiles.

Stocks don't seem to have noticed. The S&P 500, after all, is up 1.3% and having a great week. The market's response raises the question, why are investors pushing forward even as the world seems on the brink of a shift that could completely change everything overnight?

Christopher Smart, managing partner of the Arbroath Group, tackled the question in a note Thursday morning. "Above all, investors care about growth and interest rates, which explains why markets are still on fire even as the world braces for historic shifts in the alignments of global power," he wrote.

"To be clear, Russian use of even a tactical nuclear weapon would send Europe's economy into sharp recession and risk markets everywhere into a tailspin -- that is in addition to triggering colossal human tragedy and shattering decades of what is considered acceptable practice in modern warfare. But the risks faded once traders had absorbed the initial headlines this week," he adds.

Historically, geopolitical events have had a fleeting impact on equity returns. The S&P 500's 12-month and the six-month average real return were 5.5% and 2.6%, respectively, following 36 major events starting from Germany's invasion of France in 1940. The three-month average return at 0.3%, though, was much smaller than the 1.3% all-time average, according to J.P. Morgan Private Bank data cited by Smart.

"But that doesn't mean that investors can ignore geopolitics altogether. It just means that the shifting global alignments of power often have a more incremental impact on risks and returns than the thunderbolt of a single event," he concluded.

For now, the market's happy keeping Russia at the back of its mind. The earnings growth from artificial intelligence, the potential of corporate tax cuts as part of Trump 2.0, and the trajectory of interest rates are on the center stage.

Let's hope they stay that way.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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November 21, 2024 18:09 ET (23:09 GMT)

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