The aftermath of the prolonged war may impact Tech, Health and Retail stocks for the next 6-12 months. U.S. stocks had started their bear-market slide well ahead of Russia’s Feb. 24, 2022, invasion of Ukraine. In the 12 months since the invasion, the Dow Jones Industrial Average DJIA, -1.02% is effectively flat, up less than 0.1%, while the S&P 500 SPX, -1.05% is down around 5.1% after a strong start to 2023 that continued a bounce off of October lows.
The invasion may not have been the root cause of an inflationary surge in the U.S. that sparked the scramble by previously flat-footed central bankers to get inflation under control, but a surge in crude prices and other commodities didn’t help.
In Europe, a spike in inflation and a sharp economic slowdown was more directly the result of the invasion and resulting energy shock, though warmer weather and a substantial effort to replace lost Russian energy flows meant the threat of a nightmarish winter was kept at bay.
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See: Inside Germany’s industrial-sized effort to wean itself off Putin and Russian natural gas
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“Besides the horrendous cost in human lives, the cost to the world has been slower growth, higher inflation, higher policy rates and asset price destruction,” said Steven Barrow, head of G-10 strategy at Standard Bank, in a Wednesday note.
The war no longer seems front of mind for investors and traders, though the disruption to energy and trade flows endures and has yet to fully play out. Oil prices CL00, +0.17% BRN00, +0.04% are today below where they stood on the eve of the invasion.
Read: Why U.S. fuel prices continue to feel the effects of Russia’s invasion of Ukraine
Other commodity prices also spiked but fell back as markets adjusted to supply shocks.
Commodities Corner: The real impact of Russia’s invasion of Ukraine on commodities
It’s not uncommon for shocks such as the war to lose their ability to influence markets the longer the disturbance continues, Barrow wrote. But could that change?
Barrow said there are two questions for investors to consider:
“The first is whether certain adverse developments in the conflict, such as Russia ‘winning’ the war, or expanding its quest to another country, could still create a surge in global risk aversion and an asset price implosion after all this time.”
“And the second, more optimistic question is whether a sudden, and admittedly surprising, outbreak of peace could create a ‘peace dividend’ that lifts lowers risk aversion and allows global asset prices to surge?”
Barrow argued the most likely answer to both questions is no.
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A decisive victory by either side could fan the flames of market volatility, but Barrow said it appears unlikely either side can win the war militarily.
See: Russia, Ukraine prepare for potentially more disastrous path ahead as war reaches one-year anniversary
Ukraine doesn’t look like it can push Russia out of the regions it occupies and Russia doesn’t look like it can take the whole country and install its own leaders, which leaves battles to rage while financial markets remain focused on other things, like central-bank policies and recession worries, Barrow said.
Progress toward a peace deal also appears doubtful, he said, but, even if it were possible, it would do little to undo the shocks that have already occurred.
“For instance, a peace deal is not going to make Europe rush back to buy precrisis levels of Russian oil and gas,” he wrote. “The sanctions imposed by the West would likely persist as well, not least because the U.S. hegemon will want to maintain a hostile message towards China as it too faces its own issues over Taiwan.”
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Granted, a sudden surge of optimism would likely allow financial assets a knee-jerk rally, but it probably wouldn’t amount to much more than that, according to Barrow.
The most likely outcome is that the fighting remains a background factor for global asset prices, “with much more focus on how policy makers like central banks are coping with the fallout from the conflict that started almost a year ago,” Barrow wrote.
Read on:
Expect Russia’s war in Ukraine to continue into 2024, with higher prices for oil, gas and defense stocks
Five ways the year-old Russian invasion of Ukraine has changed the world
Biden administration weighs going public with intelligence behind assertion that China is considering arms for Russia
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William Watts
William Watts is MarketWatch markets editor. In addition to managing markets coverage, he writes about stocks, bonds, currencies and commodities, including oil. He also writes about global macro issues and trading strategies. During his time at MarketWatch, Watts has served in key roles in the Frankfurt, London, New York and Washington,
The rumors of a coup in Moldova. Medvedev proposing seizing parts of Poland. If you read Peter Zeihan's 2014 book, The Accidental Superpower, this was the grand strategy.
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