A Russian invasion of Ukraine would potentially unleash a 'polar vortex' on the stock market and push economies into a recession, Morgan Stanley's Mike Wilson says

• Morgan Stanley said a Russian invasion of Ukraine would pose a significant risk to global equities.
• An invasion "materially increases the odds of a polar vortex for the economy," strategists said.

Morgan Stanley said a potential Russian invasion of Ukraine would pose a significant risk to global equities and send some economies into recession.

"In our view, it materially increases the odds of a polar vortex for the economy and earnings," strategists, led by Chief Investment Officer Michael Wilson, said in a note published Monday, adding that a surge in energy prices would roil markets.

"Energy stocks could be most at risk for a correction should a potential invasion happen in a way that leads to an oil and nat gas spike," they said. "Such a spike would destroy demand, in our view, and perhaps tip several economies into an outright recession – the polar vortex."

Crude-oil prices have seen upward pressure in the past weeks amid increasing tensions between Russia, a major oil producer, and Ukraine, which is a key conduit for energy exports to Western Europe.

On Monday, oil prices moved closer to the $100-per-barrel mark. West Texas Intermediate crude rose 2.30% to $95.24 per barrel as of 2:40 p.m. ET. Brent crude, the international benchmark, gained 2.10% at $96.42.

The rally came after a US official warned an attack could come this week, saying Russia moved some long-range artillery and rocket launchers into firing position, according to CBS. US officials had warned of a possible Russian invasion before the Winter Olympics ends on Sunday.

President Joe Biden in a lengthy phone call Saturday asked Russian President Vladimir Putin to pull back the more than 100,000 Russian troops stationed at its border with Ukraine. Biden warned Putin the US would "respond decisively and impose swift and severe costs" if such an incursion happens.

The new geopolitical development adds pressure to US stocks, which have already been hit by a more hawkish Federal Reserve determined to tame inflation.

Still, Wilson said it seems the 7.5% surge in the Consumer Price Index in January, the highest in 40 years, is now "old news." Instead, what he thinks investors should focus on is growth — or the lack thereof.

"While the level of inflation is likely to remain well above the Fed's target in the foreseeable future, the rate of change may have peaked, which could reduce investors' and the market's current obsession with it," he said.

In particular, investors should focus on "Ice," he said, referring to the "Fire and Ice" narrative he discussed at length in a September note.

At that time, he laid out two near-term risk paths for the stock market: Fire, a more optimistic outlook that would occur if the Fed begins to remove monetary accommodation as the US economy overheats; and Ice, which would occur if upward earnings revisions slow and higher-frequency macro data points deteriorate. The latter, he said, would be "destructive" as it would translate to a 20% dive in the S&P 500.

Wilson has repeatedly reiterated that US equities are headed for a correction — which remains incomplete — and has given among the lowest year-end targets for the benchmark index: 5,000 as the bull case and 4,400 as the base case.

And if the invasion doesn't happen? Wilson said he simply foresees a "colder than normal winter and spring."