The Russia-Ukraine Conflict is NOT the End-Game for Stocks


"We don't prognosticate macroeconomic factors, we're looking at our companies from a bottom-up perspective on their long-run prospects of returning."


- Mellody Hobson, President and co-CEO at Ariel Investments

ronhold Capital is excited to discuss some of the reasons why the Russia-Ukraine conflict and inflation are not detrimental to the long-term success of investors in the markets.


Detailed below are the micro and macroeconomics of the situation as well as the best strategy for navigating the markets through times like this.


The Russia-Ukraine conflict has been a burden on the markets for a large portion of this year. Vladimir Putin’s decision to spontaneously invade Ukraine with the poor rationale of gaining back territory that was once theirs, yet independent from that nation for over 30 years, has many fearing global involvement. The Russian leader has directly threatened Western nations, which includes the United States, about their support of Ukraine through the invasion and the sanctions imposed on Russia. Additionally, the nation is incredibly rich in natural resources, exporting a notable amount of energy, metals, and agricultural products for global consumption. This has already started to impact supply chains, inventories, and production levels worldwide.


It is unlikely, however, that this war will escalate to the same magnitude of involvement for the United States as World War II, the Vietnam War, or the Cold War. The United States and other NATO members have made it clear they do not want to be militarily involved. Rather, the U.S. is contributing through economic sanctions and diplomatic relations. While the markets have responded negatively to the invasion, it can be seen throughout history that there is always recovery from geopolitical tensions, especially without direct participation from the U.S. military.

As a result of the tensions, there has been an impact on global food and energy prices. Russia and Ukraine are both large producers of each good, but Russia's exports are down due to sanctions and Ukraine's main focus is on defending their country rather than their economy.


However, part of the beauty of capitalism encompasses the dynamic of producers taking advantage of a gap between supply and demand. Energy and food supplies will recover as these alternative producers increase their output to match unmet demand. Therefore, these problems are short-term and should not be weighted heavily in the decision to make an intelligent investment.


Additionally, it is likely that the Fed will continue to raise rates, similar to their policy decisions in the 1970s. CPI nearly hit 15% two separate times over the course of that decade, inducing rates to rise to nearly 20%. With the current CPI being 8%, and only subject to rise due to the Russia-Ukraine conflict's impact on rising food and energy prices, 25 basis points is only the start of rate hikes from the Fed.


The U.S. economy is now in a unique situation coming out of the COVID-19 pandemic with inflationary pressure, rising rates, and war in Europe. During the Korean War, there were high levels of inflation, reaching just under 10%, yet during this period with direct United States involvement in the war, the stock market continued to rise. The monetary policy during this period was focused on controlling inflation, with multiple increases in interest rates. This shows there are exceptions to the common beliefs that the stock market always decreases during war and inflation.

In other cases, war has been more detrimental, yet not catastrophic, to the markets. During World War II, the stock market dipped over the first two years of the war, but during the final three years of the war, the markets surged. The stock market finished the war at nearly equivalent levels to where it started, but the monetary policy over that period was expansionary as the Fed lowered rates and promoted spending. This shows the ability for the markets to recover through periods of war, but monetary policy during this time was different from what is presently needed to control inflation.


These two examples of war's effect on the stock market and the continually increasing chart above show that macroeconomics really have minimal impact on the markets over time. Long-term, the market always recovers. Additionally, events like inflation, rising rates, and war are overcome if a business is high quality and managed correctly.

A great example of a long-lasting, outperforming, and excellently managed company is Coca-Cola. Their stock has continued to rise and beat expectations for over a century – this is not due to the variability in macroeconomics over that time frame, it is attributed to how well the business has been run. Their earnings power and great management over decades have made the company a great investment and, ultimately, that trumped whatever has happened with inflation, global conflict, or other macro events over time. This can be seen in the chart below, detailing the company's stock history over the past sixty years.

The business has definitely fluctuated over time, but over the sixty years observed in the chart, it can be seen why this has been an incredible long-term investment. Coca-Cola has prevailed through tough macroeconomic events like World War II, the Vietnam War, the dot-com bubble, and the credit crisis, yet it has had tremendous returns. A lot of bad things happen in the economy, but if the underlying business of a company is strong, with good management and a competitive advantage, it will end up being a great, profitable investment.


It is expected for the economy and markets to go through booms and busts, but it should be noted that there has always historically been a recovery, even throughout periods of uncertainty such as those present today. The best way to survive during times like these is through investments in high-quality businesses that have great microeconomics. As previously stated, it is very hard to predict what is going to happen in the economy on a large scale, but looking at companies through a micro lens can add more certainty about the quality and probability of success of an investment.


By: Siddharth Singhai

Disclaimer

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The views and strategies described may not be suitable for all investors. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.