Russia’s invasion of Ukraine is triggering a drop in stock prices.
But now may not be the best time to go on a stock shopping spree. That’s because prices may slide even further amid a heightened state of uncertainty, says Eric Freedman, the chief investment officer at U.S. Bank.
Wall Street’s main benchmarks clawed back from session lows Thursday after Russia’s military invasion of Ukraine overnight rocked equity markets across the globe.
The Nasdaq Composite rebounded from a morning sell-off that saw the index tumble more than 3%. The Dow Jones Industrial Averaged recouped some losses after an 800-point nosedive but continued to trade lower, down more than 500 points to 32,591.57. The S&P 500 bounced back from a drop of 1.5% to hover just below its flatline.
Meanwhile, investors flocked to safe-haven plays amid a broader risk-off trade across global markets. Gold prices surged 2.1% to $1,970 an ounce, hovering around a one-year high. WTI crude oil jumped to its highest level since July 2014, notching the biggest surge since Nov. 2020.
President Joe Biden on Thursday said in a tweet Thursday that he and G7 counterparts agreed to move forward on “devastating packages of sanctions and other economic measures” in condemnation of Russia’s attack on Ukraine.
“I condemned this unprovoked and unjustified attack by Russian military forces,” Biden said in a seperate tweet, also indicating he spoke with Ukrainian President Volodymyr Zelenskyy on steps the administration is taking to rally international condemnation.
President Joe Biden unveiled the “first tranche” of financial sanctions Tuesday targeting Russia in response to Vladimir Putin’s move to recognize the independence of two pro-Moscow separatist republics in east Ukraine and deploy troops into the areas — a move seen by Western countries as a provocation and breach of international law.
European allies acted in lockstep to reprimand Russian aggression. Germany halted approval of the Nord Stream 2 natural gas pipeline that would have deepened western Europe’s energy link to Russia, the world’s largest natural gas exporter. Fears of other energy-linked sanctions sent crude oil prices to a seven-year high and Brent crude towards $100 per barrel.
“Putin knew these were going to be coming,” CSIS International Security Program senior adviser Mark Cancian told Yahoo Finance Live. “He took his move anyway, so it’s unlikely that they will deter him.”
Risk assets slid on Tuesday as investors considered the financial market implications of an escalating threat of military attack and greater sanctions on Russia. As European allies also coordinated their response to Russia’s increased military presence in and around Ukraine, Germany halted approval of the Nord Stream 2 natural gas pipeline that would have deepened western Europe’s energy link to Russia, the world’s largest natural gas exporter. Crude oil prices spiked to a seven-year high, and Brent crude neared $100 per barrel as investors contemplated the potential for further energy-linked sanctions on Russia, the third-largest oil producer in the world.
In the U.S., the conflict creates an added headwind for investors already grappling with a hawkish shift in Federal Reserve policy to intervene more aggressively in mitigating inflationary pressures. A war between Russia and Ukraine threatens to exacerbate already surging prices and spur other economic disruptions that could complicate the Fed’s policy-making choices.
Many strategists have argued that despite the weight of geopolitical turmoil on equities, the risk-off mood among traders stems primarily from worries around interest rate hikes.
“So far, it looks like Ukraine is not the reason for the drop, despite the fears,” Commonwealth Financial Network Chief Investment Officer Brad McMillan said in a note.
“But what has pulled the markets down, if not the Ukraine crisis?” McMillan wrote. “The most likely candidate—one which makes both fundamental and mathematical sense — is higher interest rates”
Brad McMillan points out that since the start of the year, the 10-Year U.S. Treasury yield is up from 1.63% to 1.97% at an increase of 34 basis points, or 21%. Typically, higher yields mean lower valuation, pushing the forward price/earnings ratio for the S&P 500 from roughly 22.35 at the end of 2021 to an estimated 19.1, a 15% decline.
“After adjusting for earnings beats this quarter, that drop in valuations pretty much explains the drop in the market, and that rationale doesn’t leave much, if any, room for worries about Ukraine,” McMillan noted. “Wall Street, then, seems to be much more worried about Fed Chairman Jay Powell than Vladimir Putin, at least at the moment.”
Buying the stock market dip
Fears are mounting that the Russia-Ukrainian conflict could escalate as the U.S. and European allies respond to Russia.
That would have more of a direct impact on U.S. stocks than what investors are currently seeing.
But markets have largely priced in the risks of a Russian invasion of Ukraine and U.S. actions that could follow, Freedman said, adding that “some of the worst-case scenarios at least seem to be on the back burner just for now.”
So if you’re looking for an opportunity to buy stocks that are falling in price, known as “buying the dip,” you may want to consider holding out. “The store will remain open for a couple of months,” Freedman told USA Today. “But if one is sitting on a bunch of cash, could you put a little bit to work here? Yes, but we would not be aggressive in this environment.”
Investors should look out for “dividend aristocrats”, or companies that have above-average earnings and dividend growth “for an extended period of time,” said Sam Stovall, chief investment strategist at CFRA.
“Everything essentially gets thrown out with the bathwater in a market decline,” he said, explaining why it’s a good idea to consider high-performing dividend stocks during a widespread selloff.
Consequences of Russia-Ukraine conflict
It’s also important to bear in mind that the Russia-Ukraine conflict may not “end up roiling the global economy,” said Callie Cox, U.S. investment analyst at eToro. “The U.S. doesn’t rely on Russia as a top trade partner, and the fear of commodity trade disruption may be overdone,” she said, referring to oil and gas prices.
On Tuesday, oil prices closed at nearly $100 a barrel, a more than seven-year record high.
She added, “history shows that geopolitical threats often have more impact than the event itself.”
Cox pointed out that in 2014 the S&P 500 stock index lost 6% of its value over fears that Russia would occupy Crimea. Then, two weeks before Russia officially occupied the region “the market bottomed out.” After that the index went shifted into bull territory, hitting record highs on several occasions in the weeks that followed.
“When the market fears the worst, it’s often a sign that we’ve turned a corner,” Cox said. The same could prove true for the current conflict.
Anxiety over interest rates
It would better serve investors to pay more attention to the Federal Reserve’s monetary policy, analysts told USA Today.
Minutes from the latest Fed meeting signaled the central bank is ready to become more in raising interest rates to fight inflation, which is at a 40-year record high.
“There’s a risk that they’re actually going to be hiking into a weakening economy,” Freedman said. “That tends not to bode well for equity investors,” he added, referring to stocks.
Originally published on YahooFinance.com