War, what war? The stock markets that behave like Ukraine conflict never happened

If you thought armed conflict in Europe would be bad for investors, think again. Shocking as it is, many global stock markets are doing better now than before the war in Ukraine began.

Exactly one month after Russia launched its invasion of Ukraine, stock markets have again demonstrated their resilience and proved just how quickly they can overcome the impact of quite shocking events, both on a human and geopolitical level.

History is littered with evidence of this. Just look at stock markets over the past 100 years. World wars, pandemics, terrorism and financial crashes have been brushed aside. Why would massive economic sanctions and threat of nuclear war in 2022 be any different? Market participants assess the risks and price assets accordingly. Over time, every event, as awful and abhorrent as it is, turns out to be a mere blip on a chart.

When the Russian army began its invasion of Ukraine on 24 February and a humanitarian crisis unfolded, investors ditched stocks, fearing the immediate consequences of the conflict and what might happen in the days ahead.

As wider escalation became more possible and investors better understood the implications of supply disruption to commodities such as wheat and oil, stocks fell further. Putin’s nuclear threat only made things worse, while the scaling up of sanctions against Russian corporations and individuals such as politicians and oligarchs threaten economies in the West as well as Moscow. None of these issues have gone away.

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At its lowest ebb two weeks later, every major stock market was in negative territory. The FTSE 100 had fallen over 700 points, or 9.5%, from 7,498 on the 23 February, the German Dax and French Cac were both down around 12%, and the Swiss index had lost 6%.

Roll the clock forward two weeks, and one month from the start of the conflict, and it’s a very different story.

It’s business as usual on Wall Street where the Nasdaq Composite tech index is 6.8% higher now than it was just before the invasion. The S&P 500 added 5.5% and the Dow Jones 3.7%. In Japan, the Nikkei trades 6% higher and Swiss stocks are up 1.3%.

Europe, where there is far greater dependency on Russian energy, has fared less well, yet the FTSE 100 is only 0.5% lower than on 23 February, and was in positive territory yesterday. The FTSE 250 mid-cap index is actually up 0.8%. Germany, which relies on Russia for around one-third of its gas, a third of its oil and half its hard coal, is down 2.4%. France, another of Europe’s biggest consumers of Russian gas, is down 2.9%.

Source: TradingView as at close of business on 23 March 2022. Key: Nasdaq Composite index (light blue), S&P 500 (yellow), Swiss index (red), FTSE 100 (dark blue), German Dax 30 (black), French Cac 40 (green). Past performance is not a guide to future performance

What’s behind the recovery?

Stock markets typically make decisions based on a view of the economy six months into the future, which is reflected in the make-up of investment portfolios. But remember the famous quote attributed to mastermind economist John Maynard Keynes: “When the facts change, I change my mind.” When unexpected events occur or the market mood shifts, the outlook and prices change to reflect that, often quite dramatically.

There are obvious reasons for the FTSE 100’s resurgence. Old economy defensive plays have become more popular this year, as higher interest rates make growth stocks less attractive.

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Tighter monetary policy had already started a rotation out of growth stocks and into value at the beginning of 2022, particularly in the US but here as well. But there are other significant themes affecting markets.

A surge in the cost of commodities is reflected in the share prices of oil and mining companies that dominate the UK index. Expectations of further interest rate rises in 2022 have also given London’s bank stocks a boost, while a partial recovery in Chinese tech companies has fed across to stocks here with exposure to the Far East. And, of course, promises of a significant increase in spending on militaries in the West has been a major boost for the defence sector.

Source: SharePad. Past performance is not a guide to future performance

More broadly, there are other influences at play. Greater clarity on the path of interest rates both here and in the US is one. The Federal Reserve believes the American economy is strong enough to cope with several more hikes in 2022, which is a confidence boost for investors.

However, rates are still low by historical standards, and equities remain the destination of choice for many investors. It’s called TINA – there is no alternative. Until other asset classes offer greater returns than equities, or are more attractive for whatever reason, this is unlikely to change.

Despite the horrific situation in Ukraine, it is inevitable that investors will try to keep calm and carry on. Uncomfortable as it is to acknowledge, the initial shock and revulsion does eventually give way to a more pragmatic approach to investing.