The Cold Truth: War In Ukraine Won't Stop This Bull Market

With Russian troops supposedly poised to invade Ukraine, will rising geopolitical tensions doom the bull market? I doubt it—even if regional war erupts. Despite regional conflicts’ terrible, tragic human costs, history shows they lack the power to sway coldhearted markets—not for long, at least. Regional conflicts have sometimes caused stock market corrections, but not bear markets. Recognizing that harsh but true dichotomy is crucial to successful investing.

I often say bull markets end one of two ways: atop the Wall of Worry when reality falls short of exuberant expectations, or after a “wallop”—a multi-trillion-dollar economic shock, like COVID lockdowns. Many presume regional wars pack wallop potential. They don’t. Consider Ukraine. It accounts for merely 0.2% of global GDP. Its investable market comprises only two stocks totaling about $1 billion in market capitalization. Energy? Ukraine’s role in transferring Russian gas to Europe—which sparked price spikes during 2006 and 2009 disputes—has diminished sharply. Newer pipelines like the Yamal-Europe, Nord Stream 1 and TurkStream all bypass Ukraine. The result: Last year, gas exports to Europe via Ukraine were a third that of two decades ago. Not to discount the human tragedy of war—anyone with a heart knows that devastating reality. But markets are emotionless, heartless.

Will sanctions cause disruptions? Well, they never really work as intended since it costs little more than the equal of a brokerage commission to run transactions underground through a plethora of firms from other and often smaller countries who will eagerly take advantage of the opportunity.  But sanctions also, for the same reason, don’t really negatively impact markets in any real ways.

Or, will Russia via restricting energy exports cause supply shocks, compounding Europe’s energy crisis? Maybe! But any fallout likely can’t last long. Yes, import-reliant Europe gets over 25% of its oil imports and 40% of its gas from Russia. Western sanctions or Russia snubbing the continent—two big ifs—would pressure prices briefly. But remember: Markets—commodity markets included—pre-price all widely known information, data and opinions. Always. Everywhere. Few events are now more widely watched than Russia-Ukraine tensions. Markets have been factoring potential conflict into prices since November reports of Russian troops massing near Ukraine, if not longer. Most pin oil’s red-hot 2022 start to the potential invasion.

To truly shock energy prices, reality must fall short of present frightened expectations—which were bludgeoned by January’s plunge in Russian gas exports to Europe. The chance of downside surprise now looks low.

Also, supply chains adjust—not overnight, but faster than most envision. Already America has sent flotillas of liquefied natural gas across the Atlantic to help address European shortages. Other countries will redirect supply there, too, responding to price signals. Could short-term volatility strike as this plays out? Yes. But markets figure this stuff out faster than most realize.

This isn’t to say stocks ignore regional troubles. They don’t! Rather, they pre-price them, like all widely watched events. History shows pre-conflict wobbles are common as uncertainty over the potential fighting’s scope and effect grows. Headlines grip investors. Far-flung potential negatives spark fear. Stocks squirm. The Korean War, 1967’s Six-Day War, 1991’s Desert Storm, the Bosnian War, the 2003 Iraq invasion and the Israel-Hezbollah conflict all fit this pattern somewhat.

Once the outcome becomes clear, markets typically lift off—signaling the age-old mantra: “Sell on the fear; buy on the bullets.” Sometimes the tensions defuse, bringing relief. Yet stocks typically rise when fighting breaks out—not because markets and investors like war, but because uncertainty falls as the scope of the issue becomes more fully delineated. The “will-they-or-won’t-they” dominating headlines ends. Markets can examine the conflict’s scope and likely fallout—and price through and beyond it. As it becomes clear life and commerce continue as normal across the vast majority of the globe, stocks move on.

Consider the S&P 500, with its longest accurate daily price history. In five of the six examples above, it was higher at the end of the fighting than on the day before battle began—the lone exception a tiny -0.3% decline during the Israel-Hezbollah conflict. Russia and Ukraine themselves offer another example—US stocks rose during Russia’s February and March 2014 annexation of Crimea. World stocks fell just -0.1%. Both climbed through the rest of 2014, amid tense fallout that included the shooting down of Malaysia Airlines Flight 17 over eastern Ukraine.

Since good data began in 1925, only one armed conflict actually sparked a bear market: World War II. That was a rare case of regional strife spreading globally. The Russia-Ukraine turmoil looks exceedingly unable to snowball given Ukraine isn’t in NATO. Hence, no precedent exists for it to trigger a bear market. None.

Always remember: Markets aren’t like people—they don’t see events as “good” or “bad.” Instead, they callously and mechanically pre-price well-known information … and move on. They are almost always thinking something like 3 – 30 months into the future. When it comes to investing decisions, follow their lead.