Russian attack on Ukraine makes it more likely stocks will fall into a bear market

Published Thu, Feb 24 20222:26 PM ESTUpdated Thu, Feb 24 20223:44 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

The chances of U.S. stocks falling into a bear market — down at least 20% from a recent high — have risen sharply after Russia's attack on Ukraine . Strategists say there's a good possibility the S & P 500 also will move into bear market territory, breaking out of what so far has been a run-of-the-mill correction. The S & P 500 was down more than 2.5% in early trading Thursday before paring losses. At its session low, the index was off 13.7% from its Jan. 3 record high. Earlier in the day, the tech-heavy Nasdaq Composite dipped into bear market territory before rallying to trade more than 2% higher. "It may take awhile for the market to find a bottom here," said Paul Christopher, head of global market strategy at Wells Fargo Investment Institute. Christopher said there are concerns that by his recent aggression Russian President Vladimir Putin has triggered a new Cold War, creating an uncertain outlook for the global economy and trade. The S & P broke down well below 4,222, a key support level and its Jan. 24 low. That break coincided with the completion of a "head and shoulders" pattern in its chart , something technical strategists say could spur more selling and take it to the 3,800 level. "There's support at 4,220 [for the S & P 500]. There's more support at 3,850," Christopher said. "That would be 20%." The strategist said investors should focus on the fact that the U.S. economy is still solid, even if the situation in Ukraine generates more inflation. Michael Arone, chief investment strategist at State Street Global Advisors, said the Ukraine invasion increases the chance the S & P 500 could see a decline of 20%. Russia's incursion is the most serious military event in Europe since World War II, and the U.S. and its allies are in the process of setting harsh financial sanctions on the country and individuals. "It clouds the outlook for the economy and for monetary policy and for consumer spending, and I think that in the short term, you'll have continued volatility," Arone said. "The market is likely skewed to the downside until we get a clear picture on some of these things." Chief unknowns are the extent of the response from the U.S. and its allies, Russia's reaction, and what that means for Federal Reserve policy. "This is an absolutely tragic, terrible thing that is going to cause reassessment of risk and reassessment of valuations," said Julian Emanuel, chief equity, derivatives and quantitative strategist at Evercore ISI. Still, Emanuel cautioned the decline in the S & P 500 will more likely be closer to 15% to 20%, rather than 20% to 30%, because the economy is in an uptrend. "What you have to ask yourself is whether this is going to tip us into a recession. The risks of recession have increased, but the economy is accelerating as opposed to slowing, so to us, recession is not part of the forecast in 2022," he said. The military action comes at an already difficult time for the stock market. Investors have been weighing the prospect that the Fed could raise interest rates as many as seven times this year to fight soaring inflation. The consumer price index was up 7.5% in January, the highest since 1982. There also are concerns the Ukraine situation will spur even more inflation because of Russia's hold on key commodities. It also puts into doubt the central bank's ability to raise interest rates as much as expected. Russia is the largest supplier of both oil and natural gas to Europe. It is also the world's largest exporter of wheat and palladium, and is a key player in other metals markets. Brent crude futures temporarily surged above $105 per barrel Thursday. "I'm saying be patient. If you're a dollar-based U.S. investor, stay there. Don't sell it, and don't buy it," Wells Fargo's Christopher said of the stock market. "You could see Brent at $125 soon. The situation will probably end up coming piecemeal, because the Europeans can't do anything quickly, and Russia could try to retaliate." Emanuel of Evercore ISI said crude oil is the wild card, and it is one factor that could quickly determine which way the economy heads. "We think this trend has much longer staying power, and this kind of geopolitical shock, which is causing commodities prices to rise with the context of the accelerating economy, just increases the need to focus on value, which is at a valuation discount to growth," he said. Emanuel added that investors should be cautiously looking for buying opportunities. "Cash is not trash, but we're telling people with dry powder that you want to start buying very carefully and slowly and selectively. We like the names with pricing power. We like the names who are able to expand margins in an inflationary environment which has clearly accelerated in the last 24 hours," he said. Sam Stovall, chief investment strategist at CFRA, said the market sell-off has created opportunities for investors looking to add some of the reliable dividend-paying stocks on the cheap. Companies with long track records of paying out dividends include 3M, Exxon Mobil and IBM. Stovall said the chances now are greater that the S & P 500 falls into a bear market. He noted that the head-and-shoulders chart pattern suggests the benchmark could fall another 500 points. "We had the rally up to the head and then it came down and broke the uptrend. Then we tried to rally again. There was a double top around 4,600, then it came back down," Stovall said. "What it tells us is if this head-and-shoulders pattern does what is the textbook response, the market is likely to head even lower with the target 3,800."

A trader works at the New York Stock Exchange.

Bryan R Smith | Reuters

The chances of U.S. stocks falling into a bear market — down at least 20% from a recent high — have risen sharply after Russia's attack on Ukraine.