The Market Is Ignoring the War in Ukraine. It Shouldn’t Be.

As the war in Ukraine heats up, the global economy faces the risk of increased turmoil, including a sharp spike in oil prices, says Christopher Smart. (Shelby Tauber/Bloomberg)

Support for Ukraine is one of the few things that Democrats and Republicans in Congress can seem to agree on these days. And President Donald Trump has said that the U.S. now plans to send Patriot missiles to Ukraine as part of a NATO deal to help Ukraine defend itself against Russian attacks. Trump has also proposed even harsher tariffs on Russia and its trading partners if there is no peace agreement within 50 days.

The tension is escalating. But the market is ignoring it—perhaps at its own peril.

“There’s trouble afoot in Ukraine that may soon send shock waves through global markets as Russia’s attacks escalate and Western sanctions tighten,” said Christopher Smart, founder and managing partner of the Arbroath Group and a former chief global strategist at Barings, in a Substack post Monday.

Stocks were up slightly Monday, and the major indexes continue to hover around all-time high levels. Crude oil prices, too, have stabilized lately, trading at about $67 a barrel after spiking above $75 in mid-June.

Smart argues, however, that “a war that once looked consigned to the list of frozen conflicts looks like it’s heating up again fast.” He added that “the global economy faces risks of a sharp spike in the oil price, jumpier European bond yields and a damaging interruption in key trade flows.”

Investors seem fairly sanguine about a lot these days, not just the Russia-Ukraine war. The market is, for the most part, brushing aside worries about tariffs and lingering geopolitical issues in the Middle East, even though both have the potential to boost inflationary pressures.

In contrast, fixed-income investors still seem nervous about inflation. The yield on the 10-Year U.S. Treasury has crept back up to around 4.43%. It was 4.24% at the end of June.

“The stock market’s dismissal of inflation threats is not echoed by bond markets,” said Lisa Shalett, chief investment officer and head of the global investment office at Morgan Stanley Wealth Management, in a report Monday. Shalett added that “we prefer listening to the bond market and being stock-pickers.”

There are other signs of Wall Street’s complacency. The Cboe Volatility Index, or VIX, remains in the mid-to-high teens, a level that hardly denotes fear. Investors seem to be assuming that everything will work out fine in Ukraine—and the rest of the world.

The problem, though, is that stocks are now pricing in an almost perfect scenario for earnings, the economy, the Federal Reserve, and fiscal policy. The S&P 500 is trading at about 24 times earnings estimates for this year, above its five-year average. That doesn’t leave the market much wiggle room if something goes wrong.

Write to Paul R. La Monica at paul.lamonica@barrons.com