Why markets were unprepared for the Russia-Ukraine crisis

TKer.co Editor Sam Ro joins Yahoo Finance Live to discuss U.S. markets amid the geopolitical crisis between Russia and the Ukraine.

Video Transcript

BRIAN SOZZI: Welcome back. Our next guest decodes a simple question on the minds of many investors out there, and that is why are geopolitics rocking the US stock market? TKer.co editor Sam Ro joins us now. Sam, always nice to get some time with you. So what do you make of the market action this week?

SAM RO: You know, I think a lot of it has to do with the fact that no one actually really imagined that Russia was going to invade Ukraine. You know, even though we've been hearing this from the White House for weeks and maybe even months, it was just not a concern among investors and traders and professionals that, you know, that they would actually list it as a thing that was a major concern.

And, you know, why would they list it as a major concern? It's not something that actually happened yet, whereas right now, you know, investors are already concerned about stuff like high inflation and interest rate hikes and earnings growth decelerating, and, you know, we still have a pandemic happening. So I think it's just a matter of, you know, the markets just not having taken the likelihood of an invasion very seriously.

JULIE HYMAN: And so I wonder, Sam, even though, you know, it was sort of telegraphed, even if people were not taking that seriously, I wonder if it counts as a black swan, a sort of a traditional type black swan, and if it is, is that the thing that sort of could-- I mean, it's already taken down the market some, but not that much. So how are people sort of gaming out at this point, now that it has happened, how much it could continue to take down the market?

SAM RO: Sure, I mean, I think what-- I would probably put it in the same sort of field as a black swan in that, again, I don't think anybody was really making a bet that this would actually happen. But, you know, if we know anything about markets, historically, you know, the move by investors is to price in a worst case scenario very early on. And, you know, sometimes those worst case scenarios do play out.

But, you know, for the most part, whatever the worst case scenario might be doesn't play out. And so when you do get, you know, new developments of how things are escalating, if tensions and if, you know, what's going on with the invasion in Ukraine, if the developments-- you know, we're going to get bad headlines-- first of all, we're going to get bad headlines for a while. But the bad headlines aren't as bad as what some might imagine them to be. Then yeah, you could continue to see the market rally.

BRIAN SOZZI: Sam, are you surprised by how resilient the US consumer is right now? We just had consumer confidence out moments ago. I was expecting a plunge, and we haven't gotten those readings yet.

SAM RO: Yeah, that's a great question. You know, I was just listening to your guest before us talking about how, you know, something like geopolitics can weigh on consumer confidence, and that's supposed to send shockwaves through the economy. But the thing is consumer confidence has been deteriorating for months now. You know, I think it was, like, last summer, I remember writing about this. It might have been in July or August when we had this initial plunge in consumer sentiment.

And, you know, consumers were blaming this on inflation, inflationary forces. And, you know, since then, we've gotten nothing but worse than expected inflation data, and consumer sentiment has continued to deteriorate. But the hard data has been telling us that consumers have been spending increasingly so through that entire period, all the way into January when we just had, you know, the height of the Omicron variant causing all of these disruptions. And not to mention the fact, you know, January coincided with a month where we're getting all these reports of inflation, inflation hitting 40-year highs. And all that has to do with the fact that consumers are just much more healthy from a financial perspective.

JULIE HYMAN: Yeah, I'm just looking at the numbers again from this morning. Personal spending up 2.1%, even as personal income was flat, although it was expected to decline, so I guess, all things being equal, it was maybe better than estimated, Sam, so yeah.

SAM RO: Keeping in mind that during the early parts of the pandemic, you know, there was no-- like, as all the stimulus and people were still working as all of this was happening, there weren't a whole lot of options to spend during the early parts of 2020. So we-- consumers are still sitting on a tremendous amount of accumulated excess savings that they can continue to tap into.

BRIAN SOZZI: All right, we'll leave it there. Our friend, Sam Ro, from TKer.co, always good to see you. I'll check you on Twitter. Have a great weekend.