Russian-Ukraine War, Inflation Pressure Wall Street—Is The Worst Over?

The Russian-Ukraine war is beginning to put pressure on Wall Street, as American corporations, one after the other, are leaving Russia. That would undoubtedly hit the top and the bottom line of these companies, at least in the short run.

Then there are worries about Russia defaulting on its debt, leaving foreign bondholders holding the bag. And there’s anxiety over inflation, which is already running above 7% in recent months.

In addition, there are concerns about the impact of rising inflation on the Fed’s monetary tightening plans. Thus, the high volatility seen on Wall Street.

Still, Robert R. Johnson, Ph.D., CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University, thinks that investors are overreacting to headline news, as has been the case with previous geopolitical events. “Market participants often become obsessed with the crisis de jour (whether that be Brexit, a Chinese trade war, the Coronavirus pandemic, or the Russian invasion of Ukraine),” he says. “Developments related to these crises drive trading activity, and any negative or positive developments in those crises drive short-term market moves. “

Meanwhile, he points to the fact that US equities are trading in a tight range rather than falling off the cliff. “While volatile, the markets are currently in a fairly tight trading range and driven by news out of Ukraine. Both the S&P and Dow closed down about 2% for the week, but the volatility experienced by both indexes makes it seem to many investors like the returns were much worse.”

What’s next? While the Russian-Ukraine headlines will continue to drive investor sentiment, market fundamentals will be dominated by the FOMC meeting statement next Wednesday. Johnson expects the Fed to raise the Fed Funds Rate by 25-basis points, though he wouldn’t rule out the possibility of 50-basis points. In either case, it’s hard to predict how the market would respond.

Ken Mahoney, CEO of Mahoney Asset Management, expects volatility to continue in the near future, advising investors to play it safe. “Volatility remains high, and if the VIX stays elevated at these levels, investors should be playing defense,” he says. “Ideally, we want the VIX lower, like the Summer of 2021 with a gentle escalator ride up setting record after record.”

How safe? It depends on the profile of each investor and the investment horizon. “While it may be a rocky ride, historically, putting some money to work for an investor with the VIX over 30 with a long-term time horizon may not hurt at all here, as we do tend to see it level off again after the dust settles and the panic is over, and the markets can shape back up again,” he adds. “It is very hard to catch a bottom on the indexes, but if you can dollar cost average in, it is not the worst idea. Bear markets don’t scare you out, rather wear you out, and we are definitely worn out seeing the market make lower lows week by week.”

That’s when the worst is really over.