The daily ups and downs of financial markets tell us what bets market participants are placing on the future. But right now, markets are dealing with a lot of uncertainty caused by Russia’s invasion of Ukraine – and they are reacting accordingly.
One key question for investors is what will happen if Russia’s invasion escalates.
In addition to the devastating human toll, “that certainly could impose an economic hardship, certainly across Europe to a greater extent than it already has,” said Mark Luschini, chief investment strategist at Janney. “And even on a more global basis.”
What if Russia’s invasion pushes oil prices even higher? What about wheat prices? What if that makes inflation even worse? And what if that drags down the global economy?
“The margin for error, given the amount of things that are sort of worrying investors at the moment, is quite wide,” Luschini said.
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While investors can bet based on their hunches about the future, the market as a whole is reacting to what’s happening now.
“There’s a lot of stuff happening,” said Ian Dew-Becker, a finance professor at Northwestern University. “Every day [Russia’s invasion] goes on, we learn a little bit, right? It lasts at least one day longer. And so it’s the learning, that causes prices to move.”
And lately, stock prices have been moving a lot, up and down.
Dew-Becker said that kind of market volatility means that there’s a lot going on that’s changing investors’ minds.
“We don’t know,” he said. “So some days we get good news. Some people are less pessimistic, but certainly something bad could happen tomorrow, and that could bring prices back down.”
People usually don’t like not knowing. Investors typically react to volatility by moving money into assets they see as safer, said Winnie Cisar, global head of strategy at CreditSights.
“Things like U.S. treasury markets, investment grade corporate credit,” she said.
That strategy happened at the outset of the invasion. But Cisar said treasury and corporate bond markets have been getting more volatile, too.
“And what we’re actually observing, is that investors are parking their cash in cash. In money market funds,” Cisar said. “The places where they’re guaranteed not to actually lose anything because of market volatility.”
Cisar said that’s probably going to continue until investors get back to feeling comfortable putting their money at risk.