The U.S. stock market has found its albatross in the Russia-Ukraine crisis – or so the financial media would have you believe. Perhaps it's true: After all, just as tensions are rising in Crimea -- the region of Ukraine that is in the crosshairs -- U.S. stocks struggled on Friday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) both losing 0.8%. If the Ukrainian crisis is weighing on market sentiment, it really shouldn't be (more on this below).
Still, it wasn't only about geopolitical risk on Friday, as investors panned Amazon.com's (NASDAQ:AMZN) stock for its quarterly results, sending the shares down by roughly a tenth -- the worst performance of any stock in the S&P 500 (here's my full take on Amazon's earnings). Amazon's decline also hurt the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC), which fell 1.8%. One high-profile technology company, Microsoft (NASDAQ:MSFT), impressed investors with its earnings report; that was enough for the stock to outperform the broad market and its sector. In absolute terms, however, it could do no better than tread water, rising just 0.1%.
Nevertheless, here are two statistics to put today's decline in a less alarmist perspective:
- On the week, the S&P 500 was flat, not down (alright, strictly speaking, it was down... by less than 0.1%).
- The S&P 500 is less than one-and-a-half percent below its early April all-time high.
Diplomatic and particularly military escalation between Russia and Ukraine could certainly lead to further volatility in the short term, but that has everything to do with price action and psychology, and nothing to do with business values and fundamentals.
Indeed, according to data provider FactSet, as of April 15, only six companies in the S&P 500 had even mentioned the Ukraine crisis during their earnings conference call. These were FactSet's conclusions [my emphasis]:
None of the companies stated that the crisis was having a significant impact on their business to date. The comments from the companies generally fell into three camps. Two companies stated that the impact has been small and manageable (Carnival Corporation and Monsanto). Two companies stated that there has been little to no impact, and that the size of their business in the region is likely too small to have a substantial overall impact (NIKE and Johnson & Johnson). Finally, two companies stated that the situation has caused an increase in uncertainty in the markets, but did not cite a direct impact on their business (Accenture and Citigroup).
In other words, the impact on any of these companies' fundamentals has been negligible, at worst. The conflict between Russia and the Ukraine would need to get much, much worse for it to even begin to have any real impact on U.S. company profits. Even then, it's far from obvious that selling stocks would be the intelligent response for a long-term investor. At the beginning of March, when Berkshire Hathaway CEO Warren Buffett was asked if he thinks the Ukraine crisis could devolve into "a World War III situation... a return to the Cold War," this was his answer:
Well, if you tell me all of that is going to happen, I will still be buying the stock. You're going to invest your money in something over time. The one thing you could be quite sure of is if we went into some very major war, the value of money would go down.
I mean, that's happened in virtually every war that I'm aware of. So the last thing you'd want to do is hold money during a war. And you might want own a farm. You might want to own an apartment house. You might want to own securities. But, I mean during World War II you know, the stock market advanced and stock markets advance over time.
Adopting the same rationally optimistic view and long-term mind-set is critical to eliminating the constant noise we are subjected to from the financial media and, ultimately, achieving adequate investment results.