Yesterday was supposed to be a horrific day for markets, as Russia officially launched a hostile invasion of Ukraine. Instead, stocks surged. The S&P 500 rose 1.2%. The Nasdaq grew 3%. And the stocks in our Innovation Investor model portfolio registered an average gain of 7%!
You read that right. Our stocks popped 7% in a single day. Sometimes, the market won’t even register a gain like that throughout a whole year. Our stocks did that yesterday, over the course of a single trading day — on the same day that Russia invaded Ukraine.
How is that even possible?!
Because while the Ukraine invasion is unequivocally a humanitarian and socio-political tragedy, its net impact on the stock market may be somewhat positive. And its effect on growth stocks could be sizably so.
Before I go any further, let me be clear in saying that the Russian invasion of Ukraine is a tragedy with enormous, negative humanitarian implications. Many of us saw the harrowing video of a Ukrainian soldier’s final stand on Snake Island. We’re watching news pour in of Ukrainian casualties. It is a crisis that requires fixing. But as investment analysts, our job isn’t to inform the White House or the EU how to avert or respond to the crisis. It’s to analyze the economic implications of a crisis that is already underway.
On that note, the Ukraine invasion will result in three important economic phenomena.
- Commodity prices will rise.
- The global economic outlook will dampen.
- The U.S. Federal Reserve will move far more cautiously in tightening monetary policy in 2022.
We view the first two events as being minor negatives for stocks. The third is a positive — and a huge positive for growth stocks.
The Ukraine Invasion Economic Negatives Aren’t Too Bad
With respect to commodity prices, there’s no doubt they will rise. Russia is the world’s largest exporter of wheat and a major exporter of oil and various metals. All that supply will be hit with enormous sanctions in the coming weeks. Prices for those products will invariably rise. Indeed, we saw that yesterday. Oil, wheat and metal prices jumped higher.
That’s not good because it comes at a time when globally, inflation is already red-hot.
However, these commodity price spikes will likely be temporary.
There are plenty of oil reserves around the world. And between the U.S. and Middle East, there are enough to plug the supply gap to be left by heavily sanctioned Russian oil. Meanwhile, Russia exports a lot of wheat and metals to Europe — but not much to the U.S. With respect to exports to the U.S., the list is dominated by oil. And everything else constitutes little more than a drop in the ocean.
Therefore, economic sanctions against Russia will likely result in small and temporary commodity price increases that will not exacerbate the current inflation situation in the U.S.
Ukraine Invasion’s Impact on Global Economy
Also of note, Covid-related supply chain disruptions should simultaneously improve over the next few months. Covid case counts are dropping, and we’re moving into warmer weather. More and more countries will ditch quarantining and social-distancing policies. Those supply chain improvements will help offset any commodity-driven inflation.
The net impact here is a minor and temporary headwind for stocks.
Still, there is no doubt that the global economic outlook will dampen in the wake of this Russo-Ukrainian war. Unsurprisingly, the onset of new conflict tends to weigh on consumer sentiment and confidence, which usually results in weaker spending. And consumer spending is the biggest driver of the global economy. Therefore, if it wanes in the coming months, the global economy will slow.
Not to mention, the current geopolitical situation is one characterized by a plethora of unknowns. All that uncertainty will weigh on business investment, too.
Going forward, then, the global economy will likely slow — but not by much. The reality is that the slowdown will be sentimentally driven, and not fundamentally driven. Day-to-day business operations in the U.S., Canada and throughout most of the EU will remain very normal. And the continuation of these normal operations will ensure that the coming economic slowdown is a small one.
The net impact here is, again, a minor and temporary headwind for stocks.
The Economic Positive Is a Big One
Lastly — and perhaps most importantly — we have the war’s impact on the Fed.
The Ukraine invasion creates so much geopolitical and economic uncertainty, at a time when the global economy is already starting to slow. We believe it will force the Fed to move much more slowly and cautiously on its monetary tightening path in 2022.
The market agrees with us. Before the invasion, traders were pricing in a 40% chance that the Fed hiked 50 basis points in March, with the consensus belief that they will hike 6 to 8 times this year. Now traders believe there is less than a 5% chance of a 50-basis-point move in March. And consensus expectations have dropped to 5 to 7 rate hikes for 2022.
That’s a big deal because rate hikes are currently the single biggest macroeconomic driver of U.S. stocks. As expectations have risen over the past few months, stocks have dropped. If they fall over the next few months, stocks will likely rebound.
Accordingly, the rebound will likely be very pronounced in rate-sensitive growth stocks. They were crushed hardest in early 2022 as rate-hike expectations rose. They will rebound fastest if those anticipations fall back down into summer.
The proof? Our Innovation Investor portfolio, which invests in the highest-quality growth stocks, was up more than 7% yesterday.
How to Proceed During the Ukraine Invasion
What’s happening in Ukraine is an absolute tragedy. The world needs to come together to do everything it can to solve the crisis and to prevent future crises like it from emerging.
Having said that, fears of how this war will impact the U.S. stock market are overblown, mostly because the Fed is a bigger driver of the stock market than Russia. And this situation may make the Fed more dovish, which would help stocks.
To that end, we think the best thing investors can do is pile into growth stocks that will benefit from a dovish pivot in Fed policy caused by the Ukraine invasion.
These stocks should win big over the next few months. And there’s never been a better time to buy them than right now. They’ve been crushed. And yet, their fundamental revenue and earnings growth trends remain as strong as ever.
In other words, the right growth stocks could pop 100%, 200%, 300% or more over the next 12 months alone.
But which stocks are the right growth stocks?
To find out, learn more here. And, upon joining, I’ll tell you all about not just my favorite growth stocks to buy right now — the stocks that rose, on average, 7% yesterday — but also about a tiny, $3 growth stock that could end up being the biggest winner of them all.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.