Why Stock ETFs Shrugged Off Russia's Nuclear Threat

Geopolitics doesn’t have much of an impact on the stock market these days. What happened on Tuesday is case in point.

Early in the morning before the stock market had opened, headlines about Ukraine striking Russian territory using American-supplied long-range missiles crossed the wires. 

Futures tied to the S&P 500 dropped by as much as 1.1% as traders worried about the consequence of the strike, especially in the wake of Russia’s seeming willingness to more readily use nuclear weapons.

A few hours before the Ukrainian strike, Russian President Vladimir Putin had signed a decree that updated the country’s nuclear doctrine.

Under the new rules, Russia will consider using nukes against countries that provide support to other countries that attack Russia.

The decree was meant to send a warning to the United States who has been supporting Ukraine’s defense against Russia with money and weapons.

Biden Russia Ruling Prompts SPY Rise

On Sunday, President Biden had authorized Ukraine to make strikes inside Russia with long-range U.S. missiles, a move that angered Russia and prompted the nuclear update.

But even though stocks initially sold off on the escalation of the Russia-Ukraine conflict, by the time markets officially opened, they had pared half of those losses.

And less than two hours after the open, the SPDR S&P 500 ETF Trust (SPY) climbed into the green. It was last trading up by 0.5%.

The reversal is indicative of just how immune markets have become to geopolitical events. The escalation of tensions in the Middle East a few weeks ago, with Israel and Iran trading unprecedented strikes against each other, did little to throw the stock market off its sharp upward trajectory.

Even the oil market hardly reacted to the tensions. 

Perhaps investors are being reasonable. Geopolitical conflicts usually don’t have much of an impact on corporate earnings, so why should stocks sell off on the news?

That doesn’t mean, though, that investors should ignore all of the headlines. Certain events—say, an attack on a big oil production facility—could impact energy costs and by extension, corporate profits.

Worse, a dramatic event, like a Chinese invasion of Taiwan, could cripple the global economy if it leads to the loss of chip production capacity.

In other words, geopolitics don’t matter for stocks until they do.