Global markets have been falling on worries over conflict in the Ukraine. Is this the end of the multi-year bull market that has taken stocks to record highs recently? In a word no, but there are some important economic impacts that will be lasting; below, my top three market takeaways:
- Oil prices will stay higher than they should be based on demand. There’s been a lot of talk in recent months about the impact of the shale oil and gas revolution in the U.S. We’ve got so much more energy coming online at home, surely it will mean lower prices, especially when you consider that big emerging markets like China are slowing and buying less oil, right? Wrong.
The lesson from the Ukraine is that geopolitical risk matters a lot in oil markets – prices were already over $100 thanks to worries over conflict in Syria and general turmoil in the Mid-east. They are now being pushed up further as the situation in the Crimea heats up, even though other commodities have been falling because of slow demand. The world has enough energy – but just the perception that some of it may be cut off is enough to keep prices higher than they should be.
- High oil and gas prices will allow Russia to play petro-politics with Europe, making effective sanctions difficult to implement. The U.S. isn’t dependent on Russian gas, but Europe gets about 40 percent of its supply from Russia, much of it via pipelines that flow through the Ukraine. Germany and the Netherlands in particular will be affected, in part because of bad energy policies that have already pushed up prices in those markets.
German banks also have large investments in Russia, so Europe may not be able to play tough on sanctions. Why can’t the U.S. just export some of its gas to Europe if Russia plays hardball? Because unlike oil, gas is a localized market – and the first American LNG export terminal won’t be completed until next year.
- U.S. blue chips will likely rebound, but mainly because of the “prettiest house on an ugly block” phenomenon. I’ve been worried about frothy U.S. markets for some time .(U.S. large cap stocks are trading at 17 times earnings, close to the multi-year highs of last year.) Technology in particular feels like it’s in bubble territory ($19 billion for WhatsApp? What?).
But look around – where else are you going to put your money if not in high quality U.S. stocks? Even before the trouble in the Ukraine, emerging markets were doing badly – Russia and Turkey are tanking, India and Brazil are stalling and China is brewing up a real estate bubble that could make pre-2008 Florida and Arizona look like small potatoes. Europe is trying to stave off deflation, double-digit youth unemployment and possibly now higher energy prices thanks to the trouble in the Ukraine. Meanwhile, the U.S. will grow faster than the world economy as a whole this year. Valuations may be inflated, but it’s only after this bout of geopolitical conflict is over that we will we see a correction that really reflects whether the Fed inflated bull run has come to an end.