While worries about a Russian invasion of Ukraine, which Western officials say has “already begun,” drag stocks lower in the short term, markets face a bigger problem on the horizon with the Federal Reserve aggressively tightening monetary policy and raising interest rates in a bid to fight surging inflation, experts warn.
Stocks have taken a beating this month amid the Russia-Ukraine conflict: All three major indexes have plunged 5% or more in February, with the S&P 500 falling into correction territory on Tuesday.
Geopolitical risks often cause “short-term volatility” and can change the market’s day-to-day direction in a flash based on the latest headline, says Dan Kemp, chief investment officer for Morningstar Investment Management.
Though the Russia-Ukraine tensions have caused volatility in recent weeks, history shows that market fallout is likely to be short-lived, according to experts who argue investors should be more concerned about the Federal Reserve’s hawkish turn as it looks to fight surging consumer prices .
“Equity markets are more at risk from the fallout from the war on inflation than on a potential invasion of Ukraine,” says Sam Stovall, chief investment strategist at CFRA.
“While Russia/Ukraine continues to dominate the headlines, the outlook for Fed policy is still the number one macro issue facing equities,” says Vital Knowledge founder Adam Crisafulli, who adds that “stocks must still grapple with the approaching monetary tightening process” even after geopolitical risks fade.
While the possibility of a Russia-Ukraine war has spooked investors, “It’s important to understand that the impact on the US economy isn’t likely to be significant,” although higher oil prices will be the “biggest constraint” and consumer confidence could take a hit, says Lindsey Bell, Ally’s chief markets & money strategist.