The Ukraine Crisis

Last week’s Russian invasion of Ukraine and the ongoing and intensified movement this week have the world on edge and have added further uncertainty to global financial markets. The response from the U.S. and NATO is fluid and we do not pretend to know how all plays out. We certainly pray that things resolve soon and without further bloodshed.


Market volatility leading up to this moment has been normal from a historical standpoint- geopolitical crises and regional conflicts tend to hurt sentiment, create short-term uncertainty, and drive volatility. Looking back at 54 crisis events since 1907, the Dow Jones Industrial Average declined 7.1% on average,[1] according to global investment research firm Ned Davis Research.


The chart here provides a look at the impact of prior conflict on the S&P 500 index.


What we do know is that diversification[2] remains an important strategy in times like these and that attempts to anticipate what will happen are futile. Trying to extrapolate the market impact is even harder as evidenced by the sharp reversal in the markets on the day of the invasion. We anticipate continued volatility ahead but remind ourselves that the S&P 500 has an average intra- year drawdown of 14% since 1980, yet still generated a positive return in 35 out of 42 years.[3] Market volatility is a normal part of investing, and we are not proposing major changes to portfolio positioning. That said, we continue to monitor the evolving situation.


As for the near-term impact on the economy, high energy prices are a tax on consumers, and non-energy commodity price hikes could further roil global supply chains. Both could continue to rise further. Russia is the third-largest oil producer after the U.S. and Saudi Arabia, contributing 11% of global supply in 2020.[4] Prices could be triggered higher by disruptions to production or sanctions, which could then impair U.S. and global consumers that are already dealing with the highest inflation in decades. By our reading, consumers are generally in good shape with high levels of savings, job growth, and rising wages, but if the conflict led to persistently higher prices, it could weaken the global recovery.


Russia and Ukraine are important suppliers of many commodities. In a February 23rd article on, the authors note that “Russia is a low-cost, high-volume global producer for all major fertilizers, and it’s the world’s second-largest producer after Canada of potash, a key nutrient used on major commodity crops and produce. The tension in the region, as well as sanctions on Russia, could hurt trade flows.” Both countries are large providers of palladium, a necessary component of catalytic converters. With semiconductor supply already impaired, if Ukraine (a key source of multiple necessary gasses used in production) were to be disrupted it could likely mean more ripple effects for already-challenged global supply chains.


We have shared below some thoughts from Brian Wesbury, Chief Economist at First Trust, and Robert Stein, CFA – Deputy Chief Economist, who look at the impact that this situation may have on public policy and in turn overall economic growth.


Thoughts on Ukraine[5]

They say the truth is the first casualty of war…so, here we are about one week into the Russian invasion of Ukraine and the fog of war is still very thick.


Over the past few weeks, it has been conventional wisdom that Russia would take parts of Ukraine (maybe all) and then things would settle down while the world awaited further actions. In the worst-case scenario, those moves could include closing the current 40-mile wide border between Poland and Lithuania, which could lead to direct NATO military involvement and a wider conflict.


So far, things haven’t unfolded as many thought they would. Supply-chain issues for the Russian military and formidable opposition are slowing Russia’s advance. In addition, more sanctions and military help from countries around the world have given many hope that hostilities end early with Russia falling well short of its goals.


If Russia is unable to take control of Ukraine or even forced to retreat, Vladimir Putin could be in more than just political trouble. His inner circle may not like risking access to their personal wealth on what they might believe is an ill-advised military adventure. For Putin, this is a huge incentive to continue his attack, and escalate. Nothing is totally clear.


What we are more confident about is what the conflict means for public policy. Policies designed to suppress US energy production are going to be tougher for the voting public to digest. The same is true for many European countries, with Germany now discussing building a natural gas reserve.


How about green energy? Many will keep pushing it, and those projects will continue, but it’s going to be tougher to curtail drilling, extraction, and pipelines for old-fashioned fossil fuels.


Meanwhile, Build Back Better, President Biden’s plan to raise spending and taxes for the next decade, looks even less likely than before. War means disruption and many will argue we should wait and see how the economy reacts to the conflict.


In addition, while the war will likely make global supply-chain issues even more problematic and inflationary, the Federal Reserve is likely to pull back on tightening plans because of the potential economic upheaval. A rate hike of 50 basis points in March is unlikely.


Meanwhile, at least one polling average now shows the GOP ahead in the congressional generic ballot by 3.7 points over the Democrats.[6] Comparing this to historical readings suggests the government will be politically divided in 2023. In turn, divided government reduces the odds of future tax hikes and spending increases.


In addition, while not related to Ukraine, we think the Supreme Court’s recent decision slapping down private-sector vaccine mandates by OSHA is a sign that it is willing to limit the power of bureaucrats. This is good news for growth.


Put it all together and we think the prospects for more bills that expand government are waning while the Court seems to be more wary of regulatory expansions, as well.


While war is hell and our prayers are with the Ukrainians, the direction of policy is moving toward the better.

[1] bulls-on-ukraine-crisis
[2] Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk
[5] Written by Brian Wesbury, permission given by Brian Wesbury
[6] fertilizer-shortages-food-price-hikes


The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.