On Sunday, 97% of Crimeans who went to the polls for voted in favor of seceding from Ukraine and joining Russia. The result ushers in a new stage in the Crimean crisis -- one that could see Russia annexing the territory. Despite the uncertainty surrounding these events, U.S. stocks opened higher on Monday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI -1.81%) up 1.03% and 1.13%, respectively, at 10:15 a.m. EDT. This looks like a healthy, if somewhat counterintuitive, reaction to the vote.
Certainly, individual investors ought to studiously ignore "the sky-is-falling" headlines such as Reuters' "World stocks near 1-month low as western sanctions on Russia loom' "Let's not forget that the MSCI World Index put in a new all-time (nominal) high earlier this month and the S&P 500 recorded its latest record high just 10 days ago. In that context, a one-month low means nothing at all, even if you could establish that it is entirely the product of this crisis.
At this stage, the expected impact of the Crimean situation on the outlook for U.S. business is zero. (I'm not trying to minimize the issue, which has other implications -- one can't make the same statement when it comes to the impact on U.S. diplomacy and European security, obviously.) Here's another data point for context: In 2013, the United States had a net trade balance of negative $16 billion with Russia (i.e., the U.S. was a net importer of Russian goods), or less than 0.1% of last year's U.S. gross domestic product.
Despite this, expect the Crimean situation to continue to populate headlines in the financial media this week. It will have to compete with another news item, as the Federal Open Market Committee on Tuesday convenes its two-day monetary policy meeting. The consensus appears to be that the Federal Reserve will scale back its monthly asset purchases by another $10 billion, bringing it down to $55 billion per month. I think the consensus is right, and certainly don't expect the Fed to alter its policy trajectory based on events in the Ukraine. On the other hand, investors will be more interested in whether the Fed amends its forward guidance policy with regard to interest rates, as the unemployment rate is with two-tenths of a percentage point from the 6.5% threshold rate at which the Fed had previously said it would consider interest rate increases.
For investors with a contrarian streak and some appetite for risk, far from seeking to reduce their broad exposure to stocks, I think the Crimea crisis offers an opportunity to gain exposure to the Russian stock market, which is one of the cheapest in the world at somewhere near five times earnings. The iShares MSCI Russia Capped ETF (ERUS) is one way to do this reasonably cheaply. As the Financial Times' James Mackintosh wrote at the end of last month: "There are good reasons for Russia to be cheap. But ask yourself this: if you will not buy at these valuations, what price would tempt you in?"
