Markets

How the market will respond to a Russian invasion of Ukraine

Last week, Russia massed troops on the border of Ukraine and declared that a humanitarian crisis was ongoing in the country. Western leaders and the UN responded by saying "We see what you're doing. Very clever, but don't you dare cross the border, even in the guise of delivering aid, or we will view it as an invasion."

Undaunted, Putin said he would send the necessary aid via relief convoy, but not to worry, he would do so in conjunction with the International Red Cross. The problem with that story, according to CNN , is that the Red Cross "doesn't know what Putin is talking about."

And so, at this moment, a convoy of 280 trucks, all painted white, are headed toward the Ukrainian border, and no one thinks they are going to stop there. Whether the trucks contain food, medicine, soldiers or weapons, Putin will have crossed the world's line in the sand.

So how will the market respond? Not to be cynical, but merely for the sake of accuracy, I point out that the market will not respond at all to a Russian invasion of Ukraine, because the market doesn't care about Russia vs Ukraine any more than it cared about Russia vs Georgia in 2008. Now, as then, the market has issues of its own to worry about.

If there is a response-and there probably will be-it will be a response to the ongoing use of economic sanctions as a means of punishing Russia for invading Ukraine. The market will not panic, thinking World War III is imminent, because the market plays the odds, and the odds of the US being drawn into a war with Russia are essentially nil.

So here is the real question: how will the market respond to an environment in which sanctions are likely to go one for a long time, and in which there is the likelihood of even more sanctions? The short answer is the market will probably fret about it for three days, then go back to business as usual-the same way it responds to everything else negative that happens on the world stage. The net flow of money is still toward stock-that won't change until either another investment becomes more attractive than the stock market, or a major change in the economy makes it so that the wealthy are not producing more wealth.

Don't be shocked by the market's apparent lack of shock; the market cares about earnings, and damage done to corporate earnings by what amounts to a trade war with Russia will not really be that bad. Consider Schlumberger ( SLB ), an oil developer which, along with Haliburton ( HAL ), will be among the hardest hit companies. According to Schlumberger, they will lose millions of dollars as a direct result of the sanctions, so many millions, in fact, that they will earn $0.03 less per share in the coming quarter. Now consider that estimates for Schlumberger's third quarter earnings range from $1.45 per share to $1.57 per share. The range between the high and low analyst estimate is four times as great as the amount Schlumberger will have lost due to sanctions. That means that but for their having told us, it would be next to impossible for anyone to notice that there had been any impact at all.

From the human standpoint, war between Russia and Ukraine is a disaster, the enormity of which can't be described. From the market's standpoint, it's just one more thing to spend three days fretting about.

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC .

This article was originally published on MarketIntelligeneCenter.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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