Is The Market Right To Ignore The Ukraine Crisis?

Is The Market Right To Ignore The Ukraine Crisis?
Stéphane Renevier, CFA

about 2 years ago1 min

So far, US markets have shrugged off the risks posed by an escalating conflict between Russia and Ukraine.

That isn’t entirely surprising: previous geopolitical shocks – Russia’s annexation of Crimea in 2014, the killing of a top Iranian general in 2020, or the Saudi Aramco drone strike in 2019 – went more-or-less ignored, largely because they didn’t directly threaten US companies’ profits.

But this time may be different. After all, war in the region could send energy prices skyrocketing, which would significantly impact US corporate earnings at a time when they’re already under a lot of pressure from high inflation.

And two more factors could add fuel to the fire. First, US company valuations are much more stretched today than they were in the past, meaning one knock could have a much more dramatic impact. Second, the US Federal Reserve won’t be able to save the day if things turn sour: inflation is now so high that they have no choice but to raise interest rates in an effort to limit rising prices.

Of course, everything might turn out just as well as the market’s expecting. But if you want to avoid a nasty surprise, take note of that disconnect, and keep in mind that not all geopolitical events are created equal.

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