OPINION:
War is being waged in Ukraine. Europe's supplies of oil and gas are running out, with rationing a possibility some time over the next few months. Basic foods are soaring in price, and shortages may spark revolutions across the developing world. With so much going wrong, you might expect the stock market to be extremely volatile — and that many investors would decide simply to get out of equities until stability had returned.
But that would be a big mistake. As a new paper from American academics points out, in times of war, the stock market is actually more stable, not less. That was even true of World Wars I and II, as well as more minor conflicts since then. It turns out that extra defence spending creates such steady profits for major companies that returns are better, and certainly a lot easier to forecast than they are during peacetime. There is no reason to expect the war in Ukraine, and the new Cold War that will inevitably follow it, to be any different. Investors can sit back and relax — the markets are going to be predictably dull for the next couple of years at least.
It is now slightly more than three weeks since Russian forces moved across the border into Ukraine. The price of oil has jumped by almost a third since then, wheat has more than doubled and nickel has gone so far off the charts that the exchange has had to be closed down. Vast amounts of analysis and speculation have been devoted to the likely impact of the war on the markets, and hedge funds have no doubt been positioning themselves to take advantage of that. And yet the main equity indices have scarcely moved in any significant way.
The FTSE 100 was at 7480 the day before the invasion and was at 7380 heading into the weekend, down a mere 100 points. The Dow Jones is up by almost 1,000 points over the same period. Germany's Dax, reflecting the major economy with by far the most exposure to the conflict, has ambled from 14,600 to 14,300. There have been a few wild trading sessions along the way, but overall it has not made a lot of difference. If you just looked at the charts and nothing else you would probably conclude that not much was going on in the world.