By Pete Johnson
As the Russian invasion of Ukraine intensifies, global markets continue feeling the pressure. That said, investors are trying to determine how the market reacts to war to align their portfolios accordingly.
It’s now day six of war, and the most recent sanctions are wreaking havoc on global financial markets. In particular, the Moscow Stock Exchange (MOEX: MICEX), which is still closed, is down close to 30% since the start of the war.
Furthermore, the Russian currency, ruble, is also plunging, now worth less than 1 cent. Between being banned from SWIFT and ongoing sanctions from the EU, the Russian economy is being squeezed.
At the same time, most global equities are down since the start of the war. With investors on edge, volatility is spiking. The CBOE Volatility Index (VIX), also known as the “fear gauge,” continues climbing as investors grapple with what will happen next.
With this in mind, I will cover the market top to bottom to uncover the market trends. Keep reading to learn how the market reacts to war and what to expect next.
The effects of this war are hitting the commodity market especially hard. Most important, crude oil is soaring over $100, with Russia playing a major role in the global oil market. In fact, Russia is the largest exporter of oil to global markets and second behind Saudi Arabia for crude oil exportation.
Have you noticed higher gas prices at the pump recently? Average gas prices in the U.S. are up over 3% this week alone.
Yet, in Europe, where many nations import more than 80% of their oil from Russia, gas prices are hitting record highs. Not all countries in Europe rely on Russian oil directly. Still, if nations cut ties with Russia, they will need to look for other sources, pushing demand higher.
In addition, several grains such as wheat are hitting their highest level since 2008. Higher wheat prices can result in higher food prices like cereal and bread.
On the positive side, gold is finally having its moment as the “safe haven” everyone wanted it to be. The SPDR Gold Trust ETF (GLD) is up 7% so far this year. If gold continues pushing higher, we could see a breakout into ATH territory.
In fact, metals are outperforming the market by a wide margin. The SPDR Metals & Mining Index (XME) is up 25% so far in 2022 compared to the SPY down 7%.
Gold is proving to be one of the best stocks to buy during war as investors look for a safe spot to store their money.
Although many tech stocks are down significantly on the year, the sector is bouncing back this week. Down 11% in 2022, the Tech Select Sector SPDR Fund (XLK) is surprisingly up close to 5% this week.
The sector is getting a boost from cybersecurity stocks as officials warn cyberattacks may intensify. Even though software was one of the weakest stock market segments this past year, many are coming off their lows. For example, cybersecurity leader CheckPoint Software (CHKP) is breaking out at ATHs over $148 a share, up 14% in five days.
That said, here is how the FAANG stocks are performing during the war (past month).
As can be seen, tech stocks are cooling off after an explosive run during the pandemic. However, the war is showing us technology is more critical than ever.
As I have noted, the Russian ruble (RUB) is under extreme pressure as sanctions continue squeezing the economy. The U.S. dollar (USD) is up 25% in the past five days when paired with the Russian ruble.
Russian central banks are doubling interest rates to help stabilize the currency as a result. In response, the central banks noted, “external conditions for the Russian economy have drastically changed.”
Meanwhile, the USD is gaining value after slipping during the pandemic. The U.S. Dollar Currency Index (DXY), used to value the USD against other currencies, is up +7% in the past year.
On the other hand, after losing half its value since reaching ATHs in November, Bitcoin (BTC-USD) is trending once again. When the war started, I wrote bitcoin is losing its status as a safe haven. But the crypto leader is up 17% in the past five days.
One reason for this can be its status as a decentralized currency. As many people are learning, your cash can be a liability depending on where it’s stored.
On top of this, as Russians look to save their accounts from losing all value, Bitcoin volume is spiking. In fact, new reports show ruble trading volume is surging into Bitcoin, Binance (BNB-USD) and Tether (USDT-USD) for stability.
And lastly, Ukrainians are also losing access to their savings, leading to even higher crypto trading.
As we are seeing, there are no real safe havens in the market. So far, gold, the U.S. dollar and Bitcoin are fighting for that status.
With this in mind, the U.S. stock market is known for its resiliency. There are always sectors or individual stocks offering value. For example, defense stocks are setting new highs as investors brace their portfolios for a prolonged war.
Most important, nobody knows how long this war will last and how it will escalate. It’s best to prepare your portfolio now for risk going forward.
We’ve seen what happens when you have all your eggs in one basket too many times. Diversifying your portfolio with leaders in different sectors can help cushion your account during the worst.
At the same time, the U.S. is dealing with its own problems here at home. The Federal Reserve is changing its pro-growth policy stance to cool roaring inflation, which can have major impacts on the market.
Now that you know how the market reacts to war, it’s time to adjust your portfolio for what’s ahead.
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