World markets know how to recover from wars and catastrophes, as they may do this time. But Russia’s nuclear arsenal complicates the equation.

Global markets typically weaken as wars approach, strengthen long before they are over, and react to the calamities of humanity with astonishing indifference.

At least, that has been a common pattern throughout history. And, with some important caveats, this seems to be playing out in the face of Russia’s latest aggression against Ukraine.

Russia’s president, Vladimir V. Putin , has already rattled stock, bond, and commodity markets around the world . On Tuesday, US stocks stumbled and the S&P 500 index fell 1 percent in what Wall Street calls a correction: a decline of at least 10 percent from its most recent peak.

This escalating conflict has changed the value of mutual funds and exchange-traded funds in millions of pension accounts, even for people who have never thought much of Eastern Europe and who have never directly invested in oil, gas or other raw Materials.

Putin’s announcement on Sunday that he would recognize the sovereignty of two Ukrainian breakaway regions dominated by Russia and order the dispatch of Russian soldiers meant a significant increase in the risk of a much larger war.

It is not known exactly where the conflict could lead, but what the short-term implications for the market could be. “The implications for markets in the near future are relatively straightforward,” said Claus Vistesen, chief eurozone economist for research firm Pantheon Macroeconomics. “Energy prices will continue to rise and stocks will continue to fall.”

Of course not all stocks have been falling. Rising oil and gas prices have driven the energy sector that is part of the S&P 500 index, the best performer this year, and which as of Monday posted a 21.8 percent return. This came even as the general index, which almost always serves as a gauge of the stock market as a whole, is down 8.8 percent.

Energy companies like Halliburton, Occidental Petroleum and Schlumberger lead the S&P 500. And US investors have nearly $140 billion sitting in commodity ETFs, mostly energy-focused ones like the fund $35 billion Energy Select SPDR , which had yields of 23.4 percent through Monday.

But the broader stock market has been plagued by a host of problems: fears of rising interest rates , stifling inflation and continued supply chain bottlenecks . Russian threats against Ukraine are likely to further shake the market.

Still, long-term investors with well-diversified portfolios of high-quality stocks and bonds—whether held directly or through low-cost ETFs and mutual funds—may be able to weather this crisis, as they have. with many others.

While it’s common for stocks to fall amid global turbulence, US Treasuries tend to strengthen as investors seek refuge and push their prices higher. Bond prices and yields are moving in the opposite direction, and with rising interest rates, Treasuries have fallen in value this year. But in the event of a significant drop in stocks, they almost always cushion the short-term effects on portfolios that include them.

Weathering the storms in the stock market has been a good long-term strategy. A year after the bombing of Pearl Harbor in 1941, the S&P 500 grew 15 percent; a year after the invasion of Iraq in 2003, it was up 35 percent. History shows that just one year after most of the stock market crashes, the S&P 500 stock index has risen.

Russian hostilities in Ukraine could be the start of something much bigger: a geopolitical shift that plunges the world into a 21st-century Cold War. But even if that’s the case, the hard numbers suggest the financial implications for prudent, diversified investors who live far from immediate danger zones may not be as dire.

The Cold War was destructive and debilitating for vast populations, but it was an excellent period for stock market investors. Even during recessions and regional wars, the Dow Jones Industrial Average outperformed.

Here are the numbers, which I calculated over the long weekend of Presidents Day:

From President Truman’s address to Congress on March 17, 1948, in which he criticized what he called the Soviet Union’s expansion of communism in Eastern Europe, to the end of December 1991, when the Soviet Union ceased exist, the Dow gained 10.05 percent, annualized. In the 30 or so years since then, through Friday, the Dow has returned 10.77 percent annually, a little better than during the Cold War, but not much.

The price of oil is already exorbitant: it is close to $100 a barrel, compared to $65 a year ago, and it is likely to go higher, especially if Russia launches a full-scale invasion and, in response, The United States and its allies impose severe economic sanctions on it .

Oil prices are already hitting consumers. They are reflected in the cost of gasoline, the main indicator of inflation in the United States, which, according to the American Automobile Association ( AAA for its acronym in English), has already reached 3.53 dollars on average per gallon. . Inflation in the United States has already reached 7.5 percent , the highest level in the country in 40 years.

As Caroline Bain, chief commodity economist at Capital Economics, wrote on February 16: “Much will depend on whether the West imposes sanctions on Russian energy companies and/or whether Russia decides to deny the West energy supplies.” Bain noted that in a worst-case scenario, “oil and gas prices could easily double temporarily and the impact on gas prices could be more lasting.”

That said, Capital Economics and many other analysts consider such a worrying prospect unlikely. Even if energy prices continue to rise — largely due to speculation in financial markets — they may fall rapidly, based on the law of supply and demand, said Edward L. Morse, director of global commodity research at Citigroup and former assistant secretary of state for international energy policy.

Morse noted that there was unlikely to be a “significant and lasting disruption to the supply of Russian oil or natural gas,” not least because it is in neither Russia’s, nor European consumers’, nor the United States’ interest to disrupt the flow of exports. russians

Morse forecasts a decline in oil prices by the end of this year to below $65 a barrel and anticipates additional supply perhaps coming from Iraq, Venezuela, the United States, Canada and Brazil. In addition, with a diplomatic agreement between the United States and Iran , more than a million barrels per day could be added.

If the Federal Reserve and other central banks go ahead and tighten monetary policy to contain inflation, the economy will slow down and demand for energy will decrease. This would further drive the reduction in energy prices, Morse explained.

The economic damage caused by this conflict could escalate in unexpected ways. “Of course the biggest danger is the unintended consequences that we will see,” Morse said.

According to the US Energy Information Administration , Russia is not only a powerhouse in energy production, where it ranks third in oil (behind the United States and Saudi Arabia) and second in natural gas (behind of the United States).

It is also one of the world’s largest producers of diamonds, minerals and metals, such as platinum, nickel, aluminium, cobalt, copper and gold. The prices of these raw materials have been rising, but that is the least of it. The shortage of Russian raw materials could cause more bottlenecks in the supply chain in the United States.

For example, Russia is in the first place in the production of palladium , an essential component of catalytic converters that are required to reduce polluting emissions from cars that use gasoline, whose rising prices have already contributed to the increase in inflation in United States. The Norilsk Nickel company, which could enter the list of sanctions by the West, is responsible for the extraction of much of the Russian palladium.

On Tuesday, German Chancellor Olaf Scholz suspended the Nord Stream 2 natural gas pipeline connecting Germany with Russia. But it will be difficult for lawmakers to come up with other sanctions and monetary policies that meet the West’s geopolitical goals without hurting the global economy.

Economics aside, Russia’s grievances with the West have already prompted a partial rapprochement with China. If this develops into a strong alliance, it would shift the balance of world power in a direction that generations of Western strategists have tried to avoid.

“This crisis is a trip back to the future,” said Ian Bremmer, president and founder of risk consultancy Eurasia Group, in a video chat from the Munich Security Conference last week. Russia’s actions have brought the world closer to a great-power military conflict than ever before since the end of the Soviet Union.

The possibility of a confrontation between NATO forces and Russia, with its nuclear arsenal, increases the risks of the Ukraine crisis beyond rational calculation.

Still, the markets will make those calculations anyway.

History teaches us that the tougher things get, the more valuable cash and Treasury bills seem. It also shows that Cold War supporters who clung to the stock market ended up with very large investment portfolios.

That’s likely to be the case in the future as well, but it’s impossible to be sure.

 

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