On Monday, financial news outlets reported breathlessly on markets’ reactions to the crisis in Ukraine*. The Wall Street Journal said the events “rocked global financial markets.” Television business anchors used words like “roiled” and “tumbling.”
But from the point of view of a professional trader, the reaction of almost every market outside of Russia and Ukraine and their immediate neighbors was downright tame.
Russian and Ukrainian stock market indices each posted losses of between 11 percent and 12 percent Monday, which certainly represented disastrous single-day moves. For context, there have only been three double-digit percentage single-day drops in the history of the Dow Jones Industrial Average and two of those occurred during the 1929 stock market crash. Since the S&P 500 was created in 1957, the U.S. has suffered 1987’s Black Monday drop of just over 20 percent but no other drop in excess of 9 percent in one trading day.
The Polish stock market, near enough to the crisis to be worried, fell just over five percent while Hungary’s Budapest Stock Exchange fell 3.5 percent. Given that there is little liquidity and often high volatility in these markets, even these drops hardly signaled sheer panic.
Further away, in Western Europe, markets were all down, with the amount of the sell-off roughly correlating to their proximity to Russia: Germany’s DAX index was down 3.4 percent, France’s CAC 40 was down 2.7 percent, and Britain’s FTSE 100 fell 1.5 percent.
Gold and silver rallied, as is typical during periods of global instability, but with gains of 2.3 percent and 1.1 percent, respectively, even these panic-prone markets were relatively calm. The same goes for crude oil, which was up almost 2 percent the U.S. and only 1.6 percent in Europe. U.S.-traded wheat futures were up 5 percent, a very large move; Ukraine is a substantial exporter of wheat and war could obviously throw a wrench into that.
There are also rumors that Ukrainian farmers are hoarding wheat supplies to use as currency in case the turmoil causes a further plunge in the Ukrainian hryvnia — which on Monday fell about 7 percent, to a record low, versus the U.S. dollar. Corn was up to a smaller degree, but for the same reasons. (Surprisingly, the biggest commodity mover of the day was coffee, up more than 9 percent, on fears of a bad crop in Brazil — which even Russian President Vladimir Putin’s superpowers can’t influence.)
In the United States, the S&P 500 closed down about 0.75 percent, toward the high end of the day’s range, with talking heads on Fox Business and CNBC wondering aloud whether the market reaction implies that the Ukrainian situation may not be as serious as the initial worldwide reaction may have suggested.
[Update: as of early Tuesday morning, world stock markets were sharply higher, with Ukrainian and Russian indices recovering half of yesterday's losses, Western European markets recovering more than half, and U.S. stock index futures suggesting a market opening which would more than erase Monday's losses. Almost all commodities were also trading lower.]
There’s a well-known saying about my people: “Two Jews, three opinions.” But when it comes to having so many opinions as to be utterly meaningless, the real champions are financial market pundits.
While one fund manager says “it’s a buying opportunity,” the guy on the other side of the split-screen proclaims “sell into the weakness.”
Having been a trader and investor for over 25 years, here’s my advice:
Ignore them all.
The reason is that either view could be right, but there is simply no way to know at this time.
Putin may back down — but only slightly, in a way that leaves him in control of the Crimea and as the unquestioned power in the situation, and does not make it appear as if Barack Obama has out-maneuvered him (something which nobody but Obama even thinks possible). The situation may thus be turned down to a low simmer from a high boil, though it will be months or years before the flame (fueled by Russian natural gas, no doubt) is turned off entirely — with Russia always ready to relight it if it deems it in its interests. In this scenario, most Western markets will breathe a sigh of relief and return to focusing on the prospects for domestic and worldwide economic recovery.
Or Putin may escalate, such as by trying to take more of eastern Ukraine, since there are few punishments the West can impose on him that would sting him enough to override his Cold War-era approach to the former Soviet republics, namely that his role in history is to reassemble Russian power after the breakup of the USSR — which Putin called “the greatest geopolitical catastrophe of the (20th) century.”
If the current turmoil turns into substantial bloodshed, markets will tumble. And there are legitimate worries about the impact on the worldwide banking system of an international freeze of billions of dollars (you think those guys would hold rubles?) in Russian assets.
But to guess which way the Ukrainian situation will go as part of an investing strategy is utterly foolish.
Yes, foreign policy whizzes will talk about the pressure that could directly and indirectly be put on Putin by freezing financial assets of the Russian government and the country’s oligarchs, implementing travel restrictions on those very same kleptocrats, suspending Russia from the G-8, and so on.
And real experts like Fox News’ KT McFarland will rightly suggest U.S. actions such as starting construction of the international part of the Keystone XL pipeline (to lower oil prices) or renewing discussions with Poland and the Czech Republic about installing a U.S. missile defense system in one or both of those countries. (In his book, Duty, former Secretary of Defense Robert Gates suggests that the reason that such systems were canceled during President Obama’s first term was as much due to domestic politics in those countries as due to Obama’s opposition to the systems. Color me slightly skeptical.) These are not only long-term discussions but also far outside of Obama’s ideological blinders, so KT’s propositions will go unheeded by the administration.
As for President Obama, at his joint press conference with Israeli Prime Minister Benjamin Netanyahu on Monday, he spoke about the Ukrainian situation with his head angled and holding his hands apart, projecting a palpable sense of impotent cluelessness while saying that Putin "is on the wrong side of history" (along with a few hundred other meaningless, predictable words.) These are words and mannerisms of a man who is not just failing to lead, but is utterly incapable of it, and whose understanding of the world starts and ends on the South Side of Chicago.
The president and many pundits underemphasize (or miss entirely) a key fact: Putin cares much, much more about what happens in Ukraine, and in particular on the Crimean Peninsula (where Russia's Black Sea naval base is located) than any government in the West cares about Ukrainian “self-determination.” Furthermore, Russia’s control of Ukraine’s natural gas supply is a far more substantial weapon than is any potential U.S., EU or NATO action against Russia, not least because Putin and his cronies will find ways to deal with almost anything thrown at them, and they know that it is at worst a waiting game. (With Russia on the Security Council, any substantive UN sanctions are all but impossible.)
Furthermore, as a major oil exporter, the increase in the price of oil caused by the regional instability is helpful to the Russian government’s terrible budget situation. This, along with many other rarely-discussed aspects of the tremendously complicated situation, is outside the ability of people who study these things for a living, much less the ordinary investor, to process into an outcome with even a shred of certainty. No matter how sure a talking head sounds, what happens next in Ukraine is no more certain than a coin flip. In fact, it’s far less certain since a coin flip can only have two possible outcomes. And the reaction in financial markets is even less certain than that.
One of the most interesting measures of market sentiment is the CBOE’s VIX index. It attempts to capture implied volatility in S&P 500 index options and is often thought of as the “fear index.” On Monday, the VIX index closed at 16, up dramatically from 14 on Friday (though VIX is frequently up modestly, perhaps 30-40 cents, on Mondays for reasons that are beyond the scope of this note.) VIX futures, which anticipate where VIX will be on a particular date (in this case March 18), closed above 16.50, suggesting that professional traders expect a modest level of volatility to continue. But again for perspective, VIX was higher than this for most of late January and early February during a run-of-the-mill market correction. The fear index shows only the slightest whiff of serious worry. [As of early Tuesday, VIX futures were down approximately a point, to just over 15.50.]
If I were a betting man — and I am — I suspect that stock markets will get worse before they get better. And I may play the markets that way — but as a trader, and not with my investments, and in a way where my risk is limited if I am wrong, while keeping in mind that I still believe we're in a bull market and that any sell-off will be modest and short unless Ukraine explodes in violence. (See what I mean about too many opinions and caveats to be useful?) In any case, I'm waiting until Tuesday's market action to decide, since the first day of trading after an emotional event is rarely an indication of its real significance (or lack thereof.)
But my opinion is worth exactly what you just paid for it.
On the one hand, that makes it worth just as much as the opinions of those you’re watching on CNBC and Fox Business and Bloomberg; on the other hand it makes all of our opinions worth approximately zero.
The average investor should have a long-term view and should not get scared out of the market by short-term emotion (assuming you are a believer in the stocks as an investment vehicle). You should do your best to close your eyes to stock market charts that look like an EKG during a heart attack. My only good advice for you in these situations: If stock market volatility makes you feel as if you might have a real heart attack, then you probably have too much of your money in stocks.
So when you hear the pundits, the money managers, the “hedgies,” responding to the Ukrainian crisis by telling you to buy or to sell, or to overweight or avoid certain sectors, do what you’d do if I gave you the same advice: Ignore it, and watch the market the way you might watch a movie — though as of now we don’t know if we’re watching a modestly interesting drama or a horror film.
* A Ukrainian friend tells me that the name “The Ukraine,” i.e. starting the country’s name with “The,” is a holdover from when the country was a Soviet republic and should be avoided by anyone whose intent is not to imply that Ukraine remains simply a Russian territory.