The War Guide: What Should I Invest In During War Time?

It’s been nearly 80 years since World War II, and Europe has since enjoyed relative peace. The Russian invasion of Ukraine, a country roughly the size of Texas, has put an end to that peace. There is a massive economic and humanitarian crisis underway, and the impact is being felt around the world. 

So far, 1.5 million civilians have fled Ukraine for neighboring countries like Poland and Romania, and those numbers are expected to climb given the danger facing Ukraine’s 44 million residents. In response to the invasion, nations around the world have imposed severe economic sanctions on Russia in hopes that economic pressure will bring an end to the conflict.  

Of course, economic sanctions don’t just impact the target country. There are global consequences for a world that has worked to reduce barriers to international trade for decades. Among other repercussions, there has been volatility in the US stock market, and the Moscow Exchange has been closed altogether to prevent complete collapse. 

What sanctions have been put on Russia so far? What other sanctions might be coming? How is the Russian invasion of Ukraine affecting stock markets, and what should investors do to protect their portfolios? 

Sanctions: The Last Frontier Before War

Military action is intended as a last-ditch effort when all other options for preserving national security have been exhausted. Most countries want to avoid putting soldiers and civilians in harm’s way, and they don’t want to incur the expense and destruction that comes with armed conflict. 

If actual fighting is off the table in all but the most dire circumstances, there is only one other way for one country to put pressure on another country to change its behavior: economic sanctions and full embargoes.

Essentially, these are trade restrictions that prevent the target country from importing or exporting the sanctioned goods and services. Sometimes, trade restrictions are coupled with a freeze on internationally held assets and/or limitations on the target country’s ability to move money in the global market. 

The goal of sanctions is to push another country to start or stop doing something or to punish that country for undesirable activities. Unfortunately, the effectiveness of sanctions has historically been limited, and there are usually unintended consequences. 

Certainly, sanctions are effective in impacting the economies of the target countries, but they don’t typically result in creating the desired change. Furthermore, the government officials of countries targeted by sanctions are less likely than average citizens to feel an impact on their personal standard of living. Ordinary people tend to be most affected by economic declines. 

Nonetheless, sanctions continue to play an important role in international relations, as they offer an alternative to out-and-out war. As former British ambassador to the UN Sir Jeremy Greenstock put it:

“The fundamental reason for the popularity of sanctions is that there is nothing else between words and military action if you want to bring pressure upon a government.”

What Sanctions Are Being Imposed On Russia? 

Most western countries have condemned Russia’s invasion of Ukraine, and they have come together to impose a coordinated and comprehensive set of sanctions. Their intention is to bring pressure on Russia to cease its military action in Ukraine.

To date, the following sanctions against the country’s financial system, trade, and key individuals have been implemented by the United States: 

  • Prohibition on dealing with Russia’s military and development banks, along with other large Russian banks
  • Curbs on the country’s sovereign debt 
  • Sanctions on the Gazprom subsidiary responsible for the Nord Stream 2 natural gas pipeline
  • Prohibition on dealing with a number of Russia’s largest companies 
  • Restrictions on imports of US technology by Russia 
  • Freezing of trillions in Russian assets, including the personal assets of some wealthy Russian citizens – the so-called “oligarchs” – as well as Russia’s President, foreign minister, and national security officials 
  • Removing some Russian banks’ access to the global SWIFT financial messaging system 
  • Ban on Russian aircraft in US airspace 

Many other countries have taken similar measures, including Germany, France, Italy, Britain, and Canada. 

What A Russian Invasion Means For Oil

Notably absent from the sanctions thus far is a ban on the import of Russian oil and natural gas. This omission is deliberate, as Europe is heavily dependent on both. Sanctions on Russian energy would certainly be painful for Russia, but they would also push oil and natural gas prices up for the rest of the world. 

If such sanctions are implemented, Russia’s biggest European customers – Germany, the Netherlands, Italy, Poland, Lithuania, Finland, Greece, Bulgaria, and Romania – will find themselves in a precarious position energy-wise.

A disruption in supply will have unpredictable consequences, perhaps resulting in difficulties with basic needs such as heating homes.

Sanctions on Russian oil and natural gas aren’t off the table, and the escalating situation in Ukraine may require this additional step. In the meantime, even without taking Russian energy off the market altogether, the world is beginning to see economic changes – and challenges – caused by the war in Ukraine. 

For example, in Northern Ireland, more than 65 percent of homes are heated with oil. Prices for home heating oil have increased more than 35 percent since the Russian invasion of Ukraine began, nearly doubling the number of households experiencing “fuel poverty.”

Families are struggling to incorporate higher heating costs into their budgets – and that’s assuming they can secure home heating oil at all. The threat of further price increases has created something of a run on this type of fuel, which in turn has impacted supply. 

In the United States, oil prices are at a 14 year high. On March 4th alone, US crude increased by 7.4 percent, making it 26 percent more expensive than the price immediately preceding the Russian invasion of Ukraine.

Brent crude, which is the world’s benchmark, increased by 7 percent on March 4th, resulting in prices that haven’t been seen since February 2013. 

How Oil Prices Affect the Economy 

The price of oil has a profound impact on the economy as a whole, primarily because it means higher gas prices for consumers and higher energy and transportation costs for businesses. This necessarily creates inflation, which is problematic given the rapid rate of inflation already occurring prior to the Russian invasion of Ukraine.  

As gas prices go up and inflation impacts consumer staples like food, personal care items, and clothing, budgets don’t allow for as many discretionary purchases. Travel, entertainment, appliances, and cars are some of the first products to see a decline in demand.

On March 4th, the average price for a gallon of gas in the US rose $0.11, which marks the largest single-day increase since 2005, when Gulf of Mexico refineries shut down due to Hurricane Katrina. 

The total increase in the price of gasoline for the week ending March 4th came in at $0.26, which put the average price per gallon at $3.57 in the United States. At the same point in 2021, the average price of gasoline was just $2.75.

The total impact of higher oil prices on larger economic conditions cannot be predicted with any level of accuracy right now. It depends heavily on how long the war in Ukraine continues, as well as any additional developments with energy-related sanctions and disruptions to oil and natural gas supplies. 

For example, if sanctions are placed on Russian energy without successfully securing alternative energy sources, prices will go up. On the other hand, the impact of Russian oil and natural gas sanctions could be minimized by increased production in the United States and other oil-producing countries. 

There is also the possibility of a new nuclear agreement with Iran, which would end sanctions on its oil exports. In short, there are a lot of moving parts and unknown outcomes, making it nearly impossible to forecast the world’s economic future. 

Federal Reserve Chairman Jerome Powell pointed out that if the oil price increase is brief, there could be minimal impact on inflation and the larger economy. He said

“You can have an oil spike and if it just comes and goes, prices will go up, but it won’t actually affect ongoing inflation… The concern, though, is there’s already a lot of upward inflation pressure, and additional inflation pressure does probably raise at the margin the risk that inflation expectations will start to react in a way that is negative for controlling inflation.”

The analysts who have attempted to give specific guidance paint a grim picture. According to JPMorgan, if the current situation persists through the end of 2022, Brent oil prices could go as high as $185 per barrel. For context, these prices have never exceeded $148 per barrel. 

How The Fed Is Responding

There is no hard and fast rule that predicts exactly how higher oil prices will impact inflation and gross domestic product (GDP). Based on historical information, economists have determined that, on average, when the price of a barrel of oil goes up by $10, inflation goes up by 0.2 percent. Economic growth decreases by approximately 0.1 percent. 

The relationship between oil prices and inflation – and the current situation in Ukraine – puts the US Federal Reserve in a difficult position. It must balance attempts to reduce already high inflation rates with a volatile political situation – one that could change at any moment – erasing or reversing the effects of its carefully considered strategy. 

At the end of 2021, the Federal Reserve announced plans to increase interest rates over the course of 2022. Rates had been quite low since the start of the pandemic in an effort to stimulate the economy and support recovery from the dramatic March 2020 market crash.

Increasing the short-term borrowing rate for commercial banks makes it more expensive for those banks to borrow money. They, in turn, increase the rates they charge consumers for products like loans, mortgages, and credit cards. As borrowing becomes more expensive, spending slows. That tends to bring inflation into check. 

However, the previously announced plans to increase interest rates are now in question. More costly borrowing may create financial hardship for consumers already struggling with higher gas, energy, and food prices due to rising oil prices – and if interest rates are increased too much, too quickly, businesses may stop hiring or start laying off workers. In a worst-case scenario, the economy would plunge into recession. 

For the moment, the Fed has pulled back on its previous suggestion that interest rates would go up by half a percent in March 2022. It appears that the increase will be just a quarter of a percent this time.

One of the biggest factors in the Fed’s decision will be the next Consumer Price Index report, which is published by the US Department of Labor. This report monitors inflation rates, providing critical data as the Federal Reserve creates its monetary policy. 

How Russian Invasion Will Affect Stock Markets 

The Russian invasion of Ukraine – and the world’s reaction to it – has created an unusual dynamic. Russia is generally considered to be strong from a military perspective but less so from an economic perspective.

In an effort to avoid armed conflict, western nations are striking back at Russia through economic actions while studiously staying away from anything that might pull the North Atlantic Treaty Organization (NATO) into all-out war. 

Certainly, the horrors of war cannot be overstated, and keeping American soldiers out of harm’s way is a priority. However, economic sanctions are not without their own set of drawbacks.

The global economy is deeply intertwined, and that interconnectedness means damaging one country’s economy impacts others. In this case, global stock markets have reacted to rising oil prices and other economic changes – and for the most part, those reactions have been negative. 

On March 4th, the S&P 500 lost another 0.8 percent for a total decline of 1.3 percent for the week and 3.46 percent over the past month. European markets are even worse off. That same day, the Stoxx Europe 600 went down an additional 3.6 percent, which took it to its lowest point since March of 2021. 

Bank of America noted that investors sold off more than $6.7 billion in European stocks during the week ending March 4th. That figure marks the biggest divestiture of European stocks since Bank of America began tracking this information in 2004. 

Germany’s DAX decreased by 4.4 percent, which made the total loss for the week a full 10 percent. At this point, the DAX is down 20 percent as compared to its most recent high in early January 2022.

In the United Kingdom, Britain’s FTSE 100 Index suffered total losses of 6.7 percent for the week, making it the worst drop since March 2020. The Italian index declined by 6.2 percent, and the French stock market dropped more than 4 percent.  

The Russian stock exchange has been closed for a week, and Russian stocks traded on international exchanges have lost most of their value. In some cases, the drops have been so precipitous that exchanges have stopped trading altogether. 

The New York Stock Exchange halted trading for three exchange-traded funds (ETFs) focused on Russian stocks. One of them, the iShares MSCI Russia ETF, has lost 99.73 percent of its value year-to-date. When trading was suspended, share prices were at $0.06 – down from a 52-week high of $52.50. 

In addition to oil, certain commodities have increased in price because both Russia and Ukraine are important suppliers. For the week ending March 4th, palladium was up by roughly 25 percent, and wheat increased by more than 40 percent. Combined, the two countries supply nearly 25 percent of wheat exports worldwide, and Russia produces 40 percent of the world’s palladium. 

The issues with a wheat shortage are fairly straightforward. The good news is that other countries are exploring opportunities to fill the void. For example, India is the world’s second-largest producer of wheat, but it only makes up about one percent of global wheat exports. The Russian invasion of Ukraine may give India a chance to expand wheat exports, which would benefit its own economy while simultaneously easing shortages. 

A palladium shortage is of far greater concern. As with oil, higher palladium prices have far-reaching implications, and replacing palladium production isn’t a simple matter. Palladium is a rare metal that has only been found in certain parts of the world. To be clear, it is 30 times more rare than gold. 

After Russia, top producers include South Africa, Canada, the United States, and Zimbabwe. However, South Africa is the only country that comes close to Russia’s levels of production. For perspective, 210 metric tons of palladium were mined in 2020: 

  • Russia – 91 metric tons
  • South Africa – 70 metric tons
  • Canada – 20 metric tons
  • United States – 14 metric tons 
  • Zimbabwe – 12 metric tons 

Replacing Russia’s contribution to the global palladium supply presents a near-impossible task – and if it can be done at all, ramping up in other countries will be slow. 

A majority of the world’s palladium goes into catalytic converters, which means automakers that are already dealing with severe supply chain issues are about to encounter another major obstacle.

Palladium is also used in consumer electronics like mobile phones and laptop computers, which are in high demand as well. Palladium shortages have the potential to create widespread disruption to these industries, which will have a ripple effect on the larger market.

These issues represent the tip of the iceberg when it comes to whether and how the Russian invasion has affected stock markets worldwide. It’s no wonder that investors are anxious. However, with the right moves, it is possible to protect your portfolio and minimize losses during this period of uncertainty. 

How To Invest In Oil and Energy 

The first step to securing your portfolio as oil prices climb is looking into options for investing in oil and energy. The most obvious choice is a direct investment in oil and energy stocks. These are some that make sense to buy now: 

  • Chevron – profits from higher oil prices are being used to expand into alternative fuels
  • Pioneer Natural Resources – impressive dividends are on the horizon as a result of higher oil prices
  • Devon Energy – a strong history of returning profits to shareholders suggests this is a good year for dividends from Devon Energy 
  • NextEra Energy – promising growth trajectory, investments in clean energy, and a relatively low stock price make this a smart choice
  • Kinder Morgan – as one of North America’s largest energy infrastructure companies, this stock is positioned for growth 

Other opportunities to consider include Occidental Petroleum, Schlumberger, and Halliburton

Investing in individual stocks makes diversification more difficult, so you may wish to simplify with an energy ETF. These funds seek to match the returns of an underlying energy index, and they include a variety of assets in a single share. Five that are worth a look include: 

  • Energy Select Sector SPDR ETF (XLE)
  • Fidelity MSCI Energy Index ETF (FENY)
  • Invesco S&P 500 Equal Weight Energy ETF (RYE)
  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  • Vanguard Energy ETF (VDE)

Other options include the First Trust Natural Gas ETF and the Invesco Dynamic Energy Exploration & Production ETF. 

How To Invest In Palladium 

When stock market volatility and the prospect of recession loom large, investors often move towards more stable assets. Bonds are a popular choice, closely followed by precious metals like gold and silver.

However, under the circumstances, investors who wish to increase exposure to precious metals are better off with palladium and palladium-related assets. With supply in question and demand already on the rise, prices have the potential to skyrocket. 

The simplest method of investing in palladium is through ETFs that track palladium bullion. You gain the benefits of a palladium investment without the logistical challenges of buying and storing physical metals. Examples of palladium-focused ETFs include the Aberdeen Physical Palladium Shares ETF (PALL) and the Sprott Physical Platinum and Palladium Trust (SPPP)

You also have the option of purchasing shares in companies that produce or trade palladium. It’s important to note that most such companies work with multiple precious metals, so these can’t be considered pure palladium stocks. 

Examples include the following: 

  • California’s A-Mark Precious Metals
  • South Africa’s Anglo American Platinum
  • South Africa’s Impala Platinum
  • South Africa’s Sibanye Stillwater

Note that the three South African stocks are traded Over-the-Counter (OTC), and they are considered fairly high-risk. For most investors, ETFs are a better choice to protect portfolios from current market volatility. 

What Stocks Will Pop If War Expands?

Outside of oil, energy, and precious metals, there are a number of industries that do well under the current set of conditions. For example, the defense industry tends to see increased revenue during periods of war.

Top defense stocks include: 

Consumer staples are virtually recession-proof. They don’t suffer as much when the stock market is down because consumers will always find room in their budgets for food, clothing, and similar.

Top consumer staples stocks include:

Some investors have decided that now is the time to embrace Warren Buffett’s Berkshire Hathaway stock, as his methods have weathered economic ups and downs for decades.

Berkshire Hathaway already has positions in the energy, financial, and consumer staples sectors that tend to deliver consistent returns regardless of market volatility.

Better still, a single share of Berkshire Hathaway offers the same sort of diversification as a mutual fund or ETF. Each share represents ownership of dozens of assets. 

What ETFs Are A Good Bet?

It’s difficult to create the right amount of diversification without large sums of money. Buying shares in a variety of companies and creating a balance between sectors, geographies, market cap, and so forth gets expensive – fast. Exchange-traded funds (ETFs) are an effective alternative. 

Outside of energy and palladium ETFs, some of the best ETFs for the current circumstances include those focused on defense or consumer staples. Top defense ETFs include: 

On the consumer staples side, top ETFs include: 

ETFs come with a long list of benefits. For example, expenses are low, they trade like stocks, and they offer exposure to a mix of assets without a big investment. 

What Stocks Should I Sell?

As you reorganize your portfolio in response to the changes caused by Russia’s invasion of Ukraine, stocks in certain industries are a definite sell.

Unfortunately, the travel industry in general and the airline industry in particular will likely not see the post-COVID recovery they were expecting. Increased fuel prices slash profits, and it is possible that travelers will rethink their plans given the current crisis in Europe. 

The auto industry is facing challenges on multiple fronts. First, consumers tend to delay vehicle purchases during times of economic uncertainty. Second, higher oil prices mean lower demand for cars. Third, disruption in palladium supply will wreak havoc industry-wide. All in all, selling auto stocks is probably a smart move.  

Notably absent from this list are stocks and funds focused on Russian companies. The fact is, it is probably too late to sell. In many cases, they aren’t trading at all. If a sale is still possible, your shares have likely lost most of their value.

At this point, cutting losses is likely a futile effort, so there is an argument for keeping these shares on the off chance that they eventually regain some of their value. 

How Will Markets Be Affected If War Lasts Longer?

It’s hard to say exactly how markets will be affected if the war lasts longer because there are so many variables. Additional sanctions against Russia – particularly if they are related to energy production – are likely to push oil prices up further. That will amplify the market volatility that is already present. 

There is a possibility that the sudden, drastic increase in oil prices will push the United States into a recession, though for now, the risk of recession is far more serious in Europe. However, it is also possible that oil prices will stabilize and/or oil production in other countries will increase to meet demand. Under those circumstances, the market is likely to rebound fairly quickly. 

The bottom line is that historically, after an initial drop, markets don’t go down during wartime. That is especially true in the current situation, with the United States staying away from actual military intervention. The longer the conflict persists – whether the US becomes involved in the physical battle or not – the greater the likelihood that the stock market will recover and continue to grow. 

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