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Ukraine Is Winning the War Against Russia. What It Means for the Stock Market.

Ukraine’s recent success has markets feeling optimistic. (Photo by Anatolii Stepanov / AFP) (Photo by ANATOLII STEPANOV/AFP via Getty Images)

AFP via Getty Images

A quick series of lightning strikes has the stock market feeling optimistic about Ukraine’s chance of winning its war with Russia. But the weekend’s headlines shouldn’t distract from the fact that there’s still potential for further turmoil ahead.

After weeks of quiet, Ukraine staged a counteroffensive and retook control of cities including Izyum and Kupiansk, while forcing Russian troops to flee. Natural-gas prices have fallen 1.2% on Monday, while the stock markets in Europe and the U.S. continue to rally.

Still, there are many outcomes following the offensive, not all of them good. Gavekal Research’s Louis Gave notes that few soldiers want “to die far from home, for a dubious cause, in a war that seems to be going badly.” As a result, it could cause more Russian soldiers to give up their arms, and the war turn into a clear Ukranian victory. “A Russian defeat would likely see energy prices fall, inflation head lower, interest rate hike expectations get ratcheted down, and the euro and the yen bounce back. And equity markets everywhere would rip higher,” Gave writes.

That’s the most optimistic outcome. It’s also one that may be the least likely. In the past, Russian President Vladimir Putin has turned to “a ‘scorched earth’ strategy” when he was losing wars in Chechnya and Syria, and he could decide to do the same in Ukraine by bombing gas pipelines, destroying the power grid, and creating mass destruction. Another option would be a full oil embargo of the West. “In this scenario, the obvious refuge for investors would be in the equity, bond and currency markets of other energy-producing countries, including Middle Eastern countries, Brazil, Malaysia, Indonesia, Australia, Canada and the U.S.,” Gave writes.

The current Ukrainian success could also force Russia to negotiate an end to the war, though Gave sees this as being “less likely.” But even if such an outcome were to occur, it’s unlikely that the world would return to the way it was before the war, Gave says. “Russia would continue to look East not West, to sell its commodities. And Europe would still need to invest heavily to eliminate its dependence on Russian commodities,” he writes. “Such a scenario would likely trigger a nice relief rally, but this rally might not lead to a new bull market.”

Finally, Russia could somehow turn the tables on Ukraine, mount a counter-counter offensive, and defeat the Ukranian army. Gave says this scenario looks “decreasingly likely,” but it would ” be met with gloom by financial markets.”

. But no matter what happens, there is no asset class that “provides an obvious “heads I win, tails I don’t lose” play for all scenarios,” Gave says. His advice: Keep investing for the status quo of a long, drawn out, stalemate, but be “ready to shift portfolios rapidly should the facts on the ground change.”

That seems like good advice.

Write to Ben Levisohn at ben.levisohn@barrons.com