While stocks are reeling in response to the Russia-Ukraine conflict, there isn’t full-blown panic. Several developments need to occur for the stock market to take another nosedive.
Tuesday, theDow Jones Industrial Average,S&P 500,andNasdaq Compositefell 1.4%, 1%, and 1.2%, respectively. But that was well up from the lows of the day for all three indexes.
The main fear for markets is that the U.S. and other countries will have to impose harsh sanctions on Russian exports of oil, which would limit the amount available globally. The price would rise, cutting into the spending power of consumers, who are already dealing withhigh inflation.
That isn’t happening yet. President Joe Biden spoke Tuesday afternoon anddidn’t announce any sanctions on Russian oil exports. He did unveilsanctions on two large Russian financial institutions, blocked off the country’s ability to issue sovereign debt in the West, and said sanctions on Russian elites will go into effect on Wednesday. Biden has also signed an executive order prohibiting new investment, trade and financing by the U.S. in separatist regions of Ukraine.
In order for the stock market to experience another downward jolt from here, there would have to be heavy sanctions on Russian oil. “Regarding Ukraine, investors will await the announcement of new sanctions from the west against Russia and depending on how severe they are, it could add to the selling pressure on stocks,” wrote Tom Essaye, founder of Sevens Report Research.
One reason the Biden administration hasn’t yet imposed harsh restrictions is that Russia hasn’t been as aggressive as it could be. So far, the invasion of Ukraine hasn’t been full scale, which is why Biden’s response has been “proportionate,” said Kim Wallace, policy expert and senior managing director at 22VResearch.
Biden confirmed that viewpoint in his Tuesday speech, saying that the U.S. will escalate its response if Russia escalates its military aggression.
The lack of sanctions on oil, and the possibility that they might be avoided, is part of the reason why the price of oil hasn’t exactly surged in the last few days, although it has risen almost 24% this year. West Texas Intermediate crude oil, the benchmark for the U.S. market, rose about 1% to a bit over $92 a barrel Tuesday, but it is still below a multiyear high of $95, hit on Feb. 14.
Traders have digested the idea that the price of oil is on pace to rise above $100 within the next month or so—it’s up more than 11% in just the past month—so another leap higher would be needed for the stock market to fall more steeply.
“At what point does it [oil prices] destroy the stock market?” said John Kolovos, chief technical strategist at Macro Risk Advisors. “It would have to be something north of $120 to $130 — and how quickly we get there as well.”
The fact that oil isn’t spiking is helping keep stocks from dropping to scary levels. At 4,305, the S&P 500 is still 2% above its lowest level of the year, 4,222 hit in late January. At that level,a wave of buyers came in to send stocks higher.
That’s a key level to watch, says Frank Cappelleri, chief market technician at Instinet. If the index falls below it, that would indicate investors are getting more pessimistic about the economic outlook.
For the moment, the Russia issue is a market risk, but it isn’t truly alarming investors.