According to Morgan Stanley’s Mike Wilson, a Russian invasion of Ukraine has the potential to unleash a ‘polar vortex’ on the stock market and force economies into a recession.

By Jessa Martin On Feb 15, 2022

An alleged Russian invasion of Ukraine, according to Morgan Stanley, would represent a huge danger to global markets and may even cause some economies to enter a recession.

Analysts led by Chief Investment Officer Michael Wilson wrote in a report published Monday that a spike in energy costs would cause markets to roil. “In our opinion, it considerably enhances the probability of an ice age for the economy and profitability,” they wrote.

“Energy equities could be the most vulnerable to a downturn if a hypothetical invasion occurs in a fashion that results in a jump in oil and natural gas prices,” the analysts warned. “We believe that such a rise would devastate demand and could even push multiple economies into a state of recession — a situation known as the polar vortex.”

Since the beginning of the month of March, crude-oil prices have been under pressure due to rising tensions between Russia, a major oil producer, and Ukraine, which serves as a vital conduit for energy exports to Western Europe.

Crude oil prices rose on Monday, edging closer to the $100-per-barrel milestone. As of 2:40 p.m. ET, West Texas Intermediate crude was up 2.30 percent to $95.24 per barrel. Brent crude, the worldwide standard, rose by 2.10 percent to $96.42 per barrel on Friday.

According to CBS, the gathering came after a senior US source warned that an attack could take place this week, claiming that Russia has put some long-range artillery and rocket launchers into firing position. Officials in the United States have warned of a possible Russian invasion before the Winter Olympics conclude on Sunday.

President Joe Biden called Russian President Vladimir Putin on Saturday and asked him to withdraw more than 100,000 Russian troops stationed on the country’s border with Ukraine.

It was a lengthy phone discussion. If such intervention would take place, Biden told Putin that the United States would “act firmly and inflict fast and severe repercussions.”

In addition to the new geopolitical situation, the stock market in the United States has already been affected by a more hawkish Federal Reserve determined to keep inflation under control.

In spite of this, Wilson believes the Consumer Price Index’s 7.5 percent increase in January, which was at its highest level in 40 years, is now considered “old news.” Instead, he believes that investors should concentrate on the rate of growth — or the lack thereof — in the economy.

He stated that while inflation is expected to continue above the Federal Reserve’s objective for the foreseeable future, the rate of change may have reached a plateau, which might diminish investors’ and the market’s current obsession with it.

In particular, he advised investors to pay attention to “Ice,” alluding to the “Fire and Ice” narrative that he addressed in detail in a note published in September.

He identified two near-term risk paths for the stock market: Fire, which represents a more optimistic outlook that would occur if the Federal Reserve begins to remove monetary accommodation as the US economy overheats, and Ice, which represents a more pessimistic outlook that would occur if upward earnings revisions slow and higher-frequency macro data points deteriorate.

The latter, he claimed, would be “destructive,” as it would result in a 20 percent drop in the S&P 500 index of stocks.

According to Wilson, US equities are on the verge of a correction — which is still in its early stages — and he has set one of the lowest year-end targets for the benchmark index, at 5,000 for the bull case and 4,400 for the base scenario.

What happens if the invasion does not take place? Wilson predicts a “colder than average winter and spring,” according to his predictions.