The geopolitical crisis has taken a dark turn, which means a lot has changed. While history shows that the stock market doesn’t react to war over the long term, it’s a bit more complex this time around. A full-fledged war (which has now begun) will have significant and cascading repercussions on the global economy. In this article, we’ll look at what the Russia-Ukraine crisis means for inflation, the anticipated interest rate hikes, whether we’ll see the stock market crash even further.
In This Article
Stock market crash situation
It’s fair to say that just two weeks ago, no one expected Russia to invade Ukraine. And so, there was still some lingering hope of the market recovering from the slump we’ve seen since the beginning of this year. This hope was evident from the fact that short positions against many stocks remained relatively low. The absence of bearish bets, especially on blue-chip stocks like the FAANG, was an indication that investors were just waiting for the right market conditions to start buying back.
Suffice it to say, things have changed. Investors are now positioned for more pain. In light of the geopolitical crisis, investors are recalibrating the current correction cycle. Compared to past conflicts(like Crimea), the stock market may be about midway down. Unfortunately, fear might cause indiscriminate selling, and the largest risks still lie on unprofitable companies, followed by Small-Cap and Mid-cap stocks.
Speaking of indiscriminate selling, the risk of margin calls will grow, and if they happen, they’ll drag the market even further down.
And so, due to this Russia-Ukraine crisis, plus the already existing risks, like inflation and interest rate hikes, we may have a long way downwards before things can get better.
It’s not all doom and gloom, though. There’s still light at the end of the tunnel, and I’ll explain more towards the end of this article.
The effect of Russia-Ukraine conflict on inflation
The most prominent consequence of the war between Russia and Ukraine will be the rise in oil prices. At the time of this writing, Crude oil is up 8%, and Brent has surpassed the $100 mark and is now at $103.80.
Oil prices affect inflation because oil is used in so many production processes. Therefore, if oil prices increase, business input costs also increase, and the cost of the end products will also go up.
With inflation at the highest it’s ever been in 40 years, fears of a potential inflationary shock due to rising oil prices are justified.
However, if the Russia-Ukraine crisis continues over an extended period, fear of war may compel people to cut back on their spending. Consequently, demand for goods may plummet, followed by a cooling down in inflation.
Will the Fed still raise interest rates?
If the above scenario happens, the Federal Reserve will no longer need to continue with the rate hikes.
It’s also a known fact that during times of conflict, bond yields go down. That’s because more people flee to safety (bonds are some of the safest investments), causing bond prices to rise and bond yields to fall.
Mortgage rates almost always follow the 10-year bond. So if the 10-year falls, it would mean that mortgage rates would fall too.
Now, all these could go either way. So this is just my general interpretation of what’s going on in Eastern Europe and the effects on the global economy.
The long-term stock market outlook
Like I said earlier, there’s still good news. Even though geopolitical tensions have a powerful effect on market prices, this effect is relatively limited over time. For example, during the 2nd world war between 1942 and 1945, the Dow Jones went up 69%.
While past performance does not guarantee future results, the upside potential for the market is huge.