A Market-Oriented Look at Two Tragic Years in Ukraine

This coming Saturday marks two years since Vladimir Putin’s troops marched into Ukraine, kicking off a grueling, brutal war of attrition that has raged since. At the time, most expected it to be a quick decapitation of the Ukrainian government that ended with the installation of a pro-Russian puppet regime. But those expectations promptly proved false, as Russia’s invasion encountered stiff resistance and bogged down. As that reality emerged, headlines launched into speculation about a prolonged war’s impact. As Western sanctions escalated, so did estimations of the global economic damage. Two years on, those predictions haven’t borne out, providing a timely and timeless reminder about how localized conflict affects stocks.

In the first month or so after the war began, conventional wisdom said the pain would be global and brutal. Among the claims: Ukraine’s role as one of the world’s bread baskets meant grain shortages in the developing world and higher food prices for all. Its and Russia’s roles in the production of several fertilizers and metals used in semiconductor production would whack global agricultural production and tech-related manufacturing. Sanctions on Russian oil would take a major source of global crude off the market, bringing permanently higher energy prices the world over. Similar fears soon spread to natural gas, with talk of shortages in Europe that would lead to rationing, hammering heavy industry in Germany in particular, creating a big drag on global GDP. If the weight of sky-high oil prices didn’t send the world into recession, surely a European industrial depression would.

Markets priced all of these fears in short order. Oil, food and natural gas prices spiked in the invasion’s immediate aftermath, and the stock market decline that began at January 2022’s start gathered steam. Spiking commodity prices collided with post-pandemic supply chain disruptions and the lockdown-era spike in money supply to send inflation to 40-year highs, further hitting sentiment. These fears, mixed with dread of rate hikes and a host of other items, contributed to 2022’s bear market.

But most of the original fears didn’t come to fruition. Instead, stocks bottomed in October 2022 and began pricing in the better-than-expected results. Brent crude oil’s peak turned out to be March 9, 2022, with a brief retest that June. But it mostly fell for the next year and is now well below pre-invasion levels. European natural gas prices had a much wilder ride and later peak since their supply concerns came later, but their spike, too, was short-lived as nations quickly found new, non-Russian supply sources. Rationing never happened, and prices are now down to summer 2021 levels. Which is about -90% below August 2022’s short-lived high.

This doesn’t mean there was no impact—or that the impact is somehow yet to be seen. Germany continues flirting with recession, partly due to the war’s earlier elevating of natural gas prices and partly, perhaps moreso, due to its connections to China’s weak economy. But semiconductor producers have had no problem getting the metals and noble gases needed for production, which continues apace. As for food, grain and broader food prices are all well below pre-invasion levels, and the world isn’t in famine.

None of this is news to stocks, which completed their round trip from bear to bull market and are hitting new highs. This point is telling. All while war raged in Ukraine, stocks shifted cycles. Even though it took some time to manifest in the data and human consciousness, stocks were able to see that the war’s global effects were temporary, with the direct economic impact much more limited than feared. Those in the war’s theater or even on the edges of it have suffered, some in an immensely tragic fashion. For them, the path to recovery once the fighting ends will be long. But markets rightly took the cold-hearted, rational view and saw that in the vast majority of the world, it would be business as usual. Sanctions would re-route global trade of oil, natural gas and other commodities but wouldn’t take Russian supply off the market. GDP growth would continue in most of the world, and the war wouldn’t drain publicly traded companies’ earnings.

Keep this in mind as chatter about Russia, Putin and the war returns to the fore, with talk of a Moldovan invasion simmering once again. Local conflict can hit sentiment, sometimes hard, especially in the run-up. Uncertainty does that. But eventually uncertainty falls as markets assess the conflict’s limited scope and the overwhelming likelihood that the global economy will be fine, and stocks move on.