Russian-Ukrainian fears: Pre-war stock market declines tend to sound like ‘growth scares’, RBC says

As investors remain focused on the threat of a Russian invasion of Ukraine, RBC Capital Markets told investors that pre-war stock market declines tended to sound like “growth scares.”

“When it comes to Russia/Ukraine, there is no past conflict that provides a good model for how stocks might trade in the event of an invasion,” RBC analysts led by Lori Calvasina said Monday. , head of US equity strategy, in a research note. “But we found it interesting that the stock market declines around the two Iraq wars were similar to the kinds of declines we see around recessions” and fears for growth.

Read: What a Russian invasion of Ukraine would mean for markets as Biden warns Putin of ‘high costs’

The S&P 500 index fell more than 19% from peak to trough during the 1990 Gulf War, a drop that was also associated with a recession that year, according to RBC analysts. The 33% plunge in the US stock index around the second Iraq War in 2003 came as “investors were also grappling with the aftermath of the tech bubble, as well as the accounting scandals that marked the start of the 2000s,” they said.

RBC CAPITAL MARKETS RESEARCH NOTE DATED FEB. 14, 2022


The S&P 500 index is down so far in 2022 amid market jitters over high inflation and expectations that the Federal Reserve will seek to combat it this year by tightening monetary policy.

“The Fed is mostly priced into the S&P 500,” RBC analysts said, but “a Russian invasion of Ukraine may not be and currently presents one of the top risks to the stock market.”

To see: Inflation and global armed conflict have investors worried about Jay Powell’s trigger finger

The S&P 500 SPX,
+0.34%
was down modestly on Monday morning, after closing sharply lower on Friday amid a warning from the White House that Russia could soon invade Ukraine and that all Americans should leave the country in the next 24 to 48 hours.

Market concerns over Ukraine appeared to ease somewhat on Monday after Russian Foreign Minister Sergey Lavrov, speaking at a meeting with Russian President Vladimir Putin, suggested that Moscow should continue to discuss with NATO and the European Union.

“We continue to believe the January 27 lows have a good chance of holding, assuming recession is averted,” RBC analysts wrote. “But if we’re wrong, a growth alert ‘equivalent to a 15% to 20% decline from this year’s high’ is probably the right way to gauge potential downside risk.”

The S&P 500 ended Friday about 7.9% below its record close on Jan. 3, according to Dow Jones Market Data.

The Cboe VIX volatility index,
-4.52%
was high on Monday morning, trading around 30, according to FactSet data, when last checked. That’s up from around 27 on Friday and above its long-term average just below 20.

“The escalation of tensions between Russia and Ukraine comes at a time when the stock market is already vulnerable given inflation concerns and the potential for Federal Reserve tightening,” George Ball said Monday. chairman of Houston-based investment firm Sanders Morris Harris. .

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“If an armed conflict between Russia and Ukraine is somehow averted, a short-lived recovery is likely, but there are still too many worries on the horizon for any kind of movement. more sustainable upside in equities,” Ball said. “It’s time for investors to raise funds.”

According to Ball, “an investor who typically holds 5% of their portfolio in cash, the remainder in stocks and bonds, should increase the cash position to 10%-20% of their portfolio, with the remainder divided into 60% 40 mode between stocks and bonds.

“Cash is the ultimate king when markets are volatile,” Ball said.

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