The Independent Market Observer

How to Think About the Ukraine Invasion

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Mar 2, 2022 12:55:03 PM

and tagged Commentary

Leave a comment

UkraineIn recent posts, we’ve looked at both the fundamentals underlying market response to the Ukraine invasion, as well as the historical data around similar events. The conclusions were generally reassuring to us as investors. Today, though, I want to do something a bit different. Rather than consider the specifics and what they might mean, I want to ask more general questions. How should we be thinking about this? And can we use that to draw any conclusions around the likely next developments?

Evaluating a Novel Situation

What I mean by this is that when we evaluate a novel situation, we have different mental models we use, often without thinking about it. As I was working through the implications of the invasion, for instance, I found myself switching between two very different modes of thought. The first said this will soon pass, and we should be thinking about what comes after the invasion. The second, though, said we don’t know where this is going or how bad it will get—and we can’t look past it until we do.

For simplicity’s sake, let’s call these two models the natural disaster model (what comes after the hurricane?) and the pandemic model (which tries to figure out when, or if, this will end). Both are useful, but they give very different thought processes and conclusions, and it was not clear to me which was the better model.

The natural disaster model treats the invasion like a hurricane, which comes in, does a lot of damage, and then has an extended cleanup. The pandemic model treats the invasion as the first wave of trouble, to be followed by an indeterminate number of waves of subsequent problems. Of the two, for me at least, the pandemic model is the more intuitively appealing. It captures the inevitable second-order problems and effects that will be caused by the invasion. The natural disaster model simply looks too simple.

Natural Disaster Model

Yet when you review the market data from yesterday, the natural disaster model is a much better fit with how markets treat such events. The initial event hits markets, which then assess and respond to the damage and start recovering. This model also seems to be a better match for lived experience. When Russia invaded and annexed Crimea, for example, the world went back to normal quite quickly, to the extent that most of us did not remember that Russian invasion of only eight years ago. In this sense, yesterday’s invasion is likely to pass quickly both from the markets and from memory. If that is the case, then the natural disaster model will hold, and the effects should be short-lived. We won’t be talking about this in a couple of months.

Pandemic Model

That may be. But I still find the pandemic model compelling, and we need to think that through further. In the pandemic model, Ukraine would be the first wave: shocking and damaging, but ultimately not the worst of it. In this case, subsequent waves could well be Russian takeovers of other countries. Looking at the geopolitical map, that could be countries that, like Ukraine, were historical buffers between Russia and the West (e.g., the Baltics or Poland) or countries that historically were part of the central Russian core (e.g., Belorussia or Kazakhstan).

A one-off event could easily become a pattern if Putin is able and willing to make it so. If it happened once, it could happen again. That is what we need to watch for—the shift from a natural disaster to a pandemic.

Time Will Tell

Right now, the outcome is likely undetermined and the next several weeks will be critical. If Ukraine fights back effectively, and if the West stands together, we maximize the chance this invasion will “only” be a natural disaster. If not, and Putin sees this as a valid and successful strategy, then the likelihood of an extended pandemic-style series of wars becomes much more likely.

And this is why we need to consider both models in our analysis. Both are useful, but they give very different thought processes and conclusions, and it is not yet clear which is the better model. Right now, the natural disaster model seems like the best fit for the data, which is good news for us as investors. But I will be watching future events to see if the pandemic model starts to become more relevant.

Subscribe via Email

Commonwealth 2023 Economic and Market Outlook
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®