Today, we’re talking about why the war in Ukraine was such a dud for the bears.
Things got scary for a while, with open discussion of nuclear war. That seems to have abated. People were starting to believe Putin was not a rational actor, that he might drop a nuke somewhere, but it looks like the economic sanctions have been effective enough that he doesn’t want any more trouble. Russia will default on its foreign debt, imminently.
Here is how this works. Anytime the stock market faces uncertainty that is possibly negative, people extrapolate to the worst possible outcome and work backward from there. In the case of the pandemic, people imagined tens of millions of deaths and years of lockdown. The stock market tanked 35% in a month.
With Ukraine, once the stock market got over the nuclear fears, it viewed the conflict as something relatively contained and unlikely to spread. Sure, it is possible Russia will go after NATO members next, like Poland and the Baltic states, but not anytime soon. So, the stock market dropped 12%, and that was the end of that.
A lot of people are accusing the stock market of being irrational, in that it didn’t go down more, but I think it went down the correct amount. Crucially, volatility didn’t rise much, and credit spreads didn’t blow out, which tells you there was absolutely no panic. One bad part of the pandemic was all the uncertainty, and the worst-case scenario was pretty terrifying.
The market is smarter than you or I. In the beginning of the war, I was tweeting about how we were all going to get nuked into glass—and the VIX was below 30. It didn’t make sense. But the market discounting machine was working just fine. It knew before you or I did that the conflict was a stalemate and that Putin wasn’t a madman. Funny how that works.