Back in the days when the fiscal cliff was huge news in the U.S., it was noticeable how the majority of investors and Wall Street veterans displayed robust resilience to its potential pitfalls. Rather than react to the negative sentiment and seek flight under the cover of a risk-averse strategy, they traded blows with the threat of austerity and helped to drive a strong and competitive financial market. While the markets and individuals indexes certainly suffered adversely, the impact was not nearly as bad as was initially feared.
Ukraine vs. Russia: Is it the Market that will Suffer?
The same cannot be said for the current crisis in the Ukraine, however, where the political conflict with Russia has already had a hugely detrimental impact on the stock market. On Monday, the Moscow stock exchange saw a total of £34 billion wiped from its company valuations, while market leading energy firm Gazprom lost more than 12% of its cumulative value in just a few hours of trading. As a result of this, the central bank of Russia used an estimated £10 billion of its reserves to prop up the national currency and support economic stability.
This underlines the fact that investors are looking to take flight in the face of political unrest, rather than consolidate their gains and retain a focus on their existing strategy. While this approach can hardly be disputed, over time it is only likely to exacerbate any period of uncertainty and ultimately create further stagnation. The fact that the Russian government have chosen to lift their interest rate from 5.5% to 7% (the largest hike of its kind since the financial crisis of 1998) has hardly helped, but the fact remains that investors are trading on sentiment rather than logic or rational thinking.
Fight or Flight: The Investors' Choice
So what lessons can traders learn from the response to the fiscal cliff? In truth the situations are considerably different, not least because the impending fiscal cliff represented an economic hurdle that the American government had previously scaled, and one that could be overcome with short-term financial measures and legislation. The conflict between Russia and the Ukraine traverses relatively untrodden ground in the wake of the fragmentation of the Soviet Union, however, as these two nations have aligned themselves closely with each other and formed a strong economic and political bond.
While the situations are different, however, the outcomes are likely to be so diametrically opposed. The potential fall-out of a permanent conflict between Russia and the Ukraine is extremely worrying, and both parties (not to mention trade partners in Europe and the U.S.) have too much to lose if further political or military action is undertaken. This means that investors would be wise to solicit the guidance of their online brokers and keep their trading strategy firmly in mind when executing transactions, rather than reacting emotively to international news bulletins and the subjective, sensationalist opinion of media pundits.