This is a Good Time to Revisit the Concept of the Risk/Reward Ratio

American markets today, viewed several hours before the 9:30 a.m. Eastern time opening appear set for a mixed start. The S&P 500, Dow and NASDAQ are all in negative territory in the early hours but the S&P 500 and NASDAQ are struggling and it would not be surprising if they improved during the trading day. Traders, investors, observers and governments are attempting to figure out what will happen today in the Russia-Ukraine crisis. Talks have stalled as the war heads into its fifth week and renewed intelligence reports that Russian President Vladimir Putin could threaten to use Russian nuclear arms increase the nervousness. At the same time, neither side appears likely to give in and Ukraine appears to have exacted a greater toll on Russian forces than Putin may have anticipated.

Canadian markets appear also appear poised for a mixed start.

European markets are open at time of writing and are also mixed with the FTSE 100 in positive territory while the CAC40 and DAX languish in negative territory.

Amongst precious metals gold is rising slightly while silver is dropping.

Amongst currencies, the Canadian dollar, the Euro and British pound sterling are all down against the American greenback which has been burnishing its status as safe haven currency.

This follow’s Friday’s session in which stocks rose with optimism over talks between American President Joe Biden and Chinese President Xi Jinping about the Russia-Ukraine crisis. Predictably, Biden warned Jinping that there would be "consequences" if China provided material support to Russia and predictably Beijing gave no real assurances. Also predictably, both sides stressed the need for a diplomatic solution to the crisis.

That may be all that is predictable about the crisis as we head into another week of war, verbal salvos, sanctions, horrific images, crucial telephone calls and news reports. What is incalculable is the total cost in lives and in European economies. Poland is attempting to deal with 3½ million refugees. The Czech Republic, Romania and Moldova are also attempting to deal with the influx.

And we certainly know that the war will affect European equities, but it will also affect other holdings. Some analysts have downgraded their forecasts on high-rated McDonald’s in the most recent indication that Western corporations will feel the impact of the war.

Morgan Stanley said it now expects net profit from the fast-food company of $9.25 a share for this year and $10.62 for 2023, reductions of 8% and 3%, respectively, from its prior view, according to a Reuters report. That followed the fast-food chain’s decision to close approximately 850 locations and continue paying approximately 62,000 employees.

Several strategies will help cope with the tumult we expect to come this week. Amongst them, this is a fun time to revisit the concept of the risk/reward ratio. The concept has several interpretations but the one I prefer is that the potential reward increases or decreases with greater or lesser risk in an investment. Bank certificates paying 1% or less have minor risk but also little reward. (There are more complex mathematical calculations that in effect follow the same principle.)

We need to revisit the calculation in light of market tumult and this is a question for advisors and clients to consider with specific equities even if they had considered it previously since the outlooks for some equities have changed. Has McDonald’s, which until now had attracted target prices ranging as high as $303 at RBC Capital, $305 at Barclays Plc. $306 at Jefferies Financial Group and even $314 at Tigress Financial Partners LLC become more of a risk than previously? In the short-term perhaps but it should stabilize over the longer term.

The Russia-Ukraine war may have an impact on first quarter results at Nike Inc. Its Nike numbers are also likely to show the effect of COVID19 cases in China and supply chain problems and it has closed its operations in Russia. Nike now has more risk attached to it than previously.

The Russia Ukraine war may also have an impact on Carnival Corporation’s first-quarter results expected tomorrow. Revenue looks good for the quarter and has likely been boosted by recovering demand for cruise travel but investors will be listening for management comments on the war, Omicron and rising costs.

The market tumult does not necessarily mean selling or buying any specific holding. With many portfolios it may just mean re-assessing the risks.

Related: Notwithstanding the Confusion in the Markets Some Things Are Clear

Al Emid is a financial journalist, broadcaster and author with two books underway.

The Emid Report on Volatility 2022 – the next in the series -- is scheduled for release in Summer 2022 and his book on foreign investing is scheduled for release in January 2023.