Schwab Market Perspective: Fog of War

The Russian invasion of Ukraine overturned a lot of assumptions about the near-term direction of the global economy. “Black swan” events like this don’t happen often, but we’re in the middle of one now, and the situation is changing daily.

For global stocks, the key question is whether the conflict will result in a European recession. Historically, global stocks have recovered and posted gains after periods of armed conflict—except when a recession followed. U.S. stock market investors are keeping a close eye on soaring energy prices and rising inflation, which typically hurt household spending. The U.S. household savings rate is already at its lowest point since 2013, providing little cushion for consumers.

Meanwhile, the Federal Reserve is caught in the middle just before a March 15-16 meeting at which it has been widely expected to begin raising rates. The Fed has been signaling tighter monetary policy for months, and if it fails to follow through, it could lose its inflation-fighting credibility. On the other hand, if it tightens policy too much or too fast, it could push the economy into a recession.

The conflict also was a catalyst in ending the perennial standoff in Washington over the federal budget. More than $13 billion in aid for Ukraine was added to the massive government funding bill, and a bipartisan desire to get aid to Ukraine quickly led to the massive spending agreement getting across the Congressional finish line.

Global stocks and economy: War in Eastern Europe

The Russian assault on Ukraine continues to intensify, with attacks on cities and infrastructure. Russia seems determined to continue the assault, and while NATO military action remains unlikely, further steps on sanctions look increasingly inevitable. Europe is the main focus of investor concern due to its proximity to the conflict and its dependence on Russian energy. The escalation raises the potential for further energy price inflation and economic recession in Europe.