Gavin W. Stephens

Chief Investment Officer

War in Ukraine: Implications for the Economy and Markets

March 2022


Following Vladimir Putin’s decision to invade Ukraine, we have fielded many questions about potential spillover effects of the war on the global economy and on financial markets. Although we cannot be certain how the tragedy in Ukraine will unfold, we can define a list of likely outcomes related to the economy and markets. Listed below are some of those primary considerations and potential outcomes.


While our job is to contemplate the financial effects of this war, our focus is not meant to diminish the heartbreaking loss of property, freedom, and life that is unfolding in Ukraine.  Our thoughts are with the people of Ukraine and others affected by the war, and we fervently hope for a swift and peaceful resolution to this tragic situation.



  1. The war in Ukraine is a horrific humanitarian crisis. Sanctions on commodities, including Russian oil and natural gas exports, cause the humanitarian crisis to extend to a potential economic crisis.


  1. Do not make quick investment decisions in response to geopolitical headlines.
    • Make sure you stay focused on your well-crafted investment plan.
    • Recognize that markets are highly sensitive and volatile—especially in the “Fog of War”—and that news will change quickly.
    • It is very difficult to know how this conflict will develop and its ultimate effect on the US economy.


  1. The war in Ukraine is disrupting supply chains and will increase near-term inflation.
    • US consumers are already facing higher gasoline prices. The war will also likely increase food inflation for US consumers.
      • 85% of Russian exports are commodities.
      • Russia accounts for over 10% of global oil and natural gas production.
      • A comprehensive ban on Russian oil exports by Western nations would push the price of oil even higher—though this increase could feasibly be offset by more supply from various sources, such as use of strategic petroleum reserves (SPC) and increased output from OPEC, the US, and other oil-producing countries.
      • Bringing increased supply to market requires reworking supply chains. Reducing oil prices through more supply will work with a delay.
      • It is probable that Russian oil will continue to be bought by non-Western nations, despite any bans imposed by the West.
    • Supply chain disruptions—particularly those related to autos and semiconductors—will continue.
      • Palladium: Russia accounts for over 40% of global production. Palladium is key input for catalytic converters.
      • Neon: Russia is a key exporter of neon – critical to production of semiconductors.
      • Nickel: A key component in electric-car batteries. Russia produces 6% of the world’s nickel.


  1. Higher inflation will slow discretionary spending among consumers. This is especially likely in Europe.
    • A negative for certain consumer discretionary stocks—insofar as commodity-related inflation dampens the ability and willingness of consumers to spend on discretionary goods and services.
    • This dynamic will be felt more acutely in Europe than in the US. Economic growth will take a larger hit in Europe than in the US.
    • The duration of commodity-fueled inflation will be critical in determining the course of the economy. The longer energy prices are high, the more likely that discretionary consumer spending will fall and that economic growth will slow.
    • At this point, it is difficult to imagine Russia reclaiming its position among global energy exporters to the West.


  1. The war in Ukraine will lead to increased defense spending and a rerouting of energy sources.
    • Following the invasion of Ukraine, Germany announced a plan to modernize its military by spending at least 2% of gross domestic product each year on defense. This decision represents a policy reversal, and we expect other Western countries to follow with similar increases in defense spending.
    • To offset the loss of Russian energy imports, U.S. oil and gas companies will be encouraged to increase domestic energy production in part to provide energy to Europe.
    • We also expect Western governments to accelerate the push for renewable energy sources.


  1. The “Fog of War” will not cause the Federal Reserve to deviate from its initial path toward policy normalization.
    • Inflation at 40-year highs requires the Federal Reserve to hike interest rates and reduce its balance sheet.
    • The yield curve should continue flattening as this process unfolds and the demand for longer-term Treasury havens continues.


The Federal Reserve will monitor the effects of higher commodity prices on consumer spending and the economy. Slower economic growth is disinflationary. To the extent that higher commodity prices cause consumer spending to slow, the Federal Reserve will be less aggressive with its tightening policies.




DISCLAIMER: The information provided in this material should not be considered as a recommendation to buy, sell or hold any particular security. This report includes candid statements and observations regarding investment strategies, individual securities, and economic and market conditions; however, there is no guarantee that these statements, opinions, or forecasts will prove to be correct. Actual results may differ materially from those we anticipate. The views and strategies described in the piece may not be suitable to all readers and are subject to change without notice. You should not place undue reliance on forward-looking statements, which are current as of the date of this report. The information is not intended to provide and should not be relied on for accounting, legal, and tax advice or investment recommendations. Investing in stocks involves risk, including loss of principal. Past performance is not a guarantee of future results.