Escalating tensions between Russia and Ukraine came to a head early Feb. 24 when Russia launched a deadly invasion into its neighboring nation, with explosions and missile strikes in Ukraine’s capital of Kyiv and several other cities. The potential for Russian military aggression in Ukraine has been weighing on global financial markets for weeks. The military assault triggered a sharp sell-off in the S&P 500 and pushed the Nasdaq briefly into bear market territory before both stock indexes bounced back into positive territory in a wild trading session.
Russian President Vladimir Putin has said his goal is the “demilitarization” of Ukraine and claims Russia has no intention of occupying the territory. Some experts speculate that Putin’s true goal is to replace Ukraine’s pro-Western government with a new regime that is more sympathetic to Russia.
The U.S. and its allies in the North Atlantic Treaty Organization, or NATO, have vowed to further increase their troop presence in eastern Europe. On Thursday, U.S. President Joe Biden, along with leaders of other Western nations and Japan, announced a set of sanctions on Russia aimed at holding Putin accountable for the military aggression.
The full effect of the sanctions and of the conflict itself on markets is still unknown in this confusing and destructive time. But here are some things investors should know about how markets tend to react to war and armed conflict:
— Stocks that fall in times of conflict.
— Stocks that can benefit from armed conflict.
— How war affects commodity prices.
— How was affects cryptocurrency prices.
— Stock market outlook.
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Stocks That Fall in Times of Conflict
On Feb. 24, investors got a glimpse at which stocks may be hit hardest if the global conflict in Ukraine escalates further. Travel and leisure stocks were among the worst performers in the S&P 500 in morning trading, including online travel stock Expedia Group Inc. (ticker: EXPE), casino operator Las Vegas Sands Corp. (LVS) and airline stock United Airlines Holdings Inc. (UAL).
In addition to travel stocks, bank stocks also took a big hit on the Ukraine news. Some experts speculate that the uncertainty of the Ukraine conflict coupled with the stock market volatility it has triggered will force the Federal Reserve to be more conservative in raising interest rates to combat inflation. Bank stocks that benefit from higher interest rates, including Fifth Third Bancorp (FITB), Signature Bank (SBNY) and Wells Fargo & Co. (WFC) were among the worst performers in the S&P 500 on Thursday morning.
Stocks That Can Benefit From Armed Conflict
Not surprisingly, leading defense stocks have performed relatively well so far in 2022. Shares of military electronics technology company L3Harris Technologies Inc. (LHX) gained more than 4% on Thursday morning. Shares of defense contractor Northrop Grumman (NOC) also traded higher by more than 2%. Year to date, the stock prices of defense giants Lockheed Martin Corp. (LMT) and Raytheon Technologies Corp. (RTX) are up more than 7% each while the S&P 500 has slumped.
In addition to defense stocks, rising energy prices around the world have been a tail wind for the energy sector. In fact, 11 of the 12 best-performing stocks in the S&P 500 so far in 2022 are oil and gas stocks. Top performers include oil services companies Halliburton Co. (HAL) and Schlumberger Ltd. (SLB) and oil and gas exploration and production company Occidental Petroleum Corp. (OXY). All three stocks are up more than 30% so far this year.
[SEE: 7 Best Utility Stocks to Buy for Dividends]
How War Affects Commodity Prices
The rally in energy sector stocks has been driven in large part by rising crude oil prices. On Thursday, the price of Brent crude oil initially jumped more than 8% and eclipsed $100 per barrel for the first time since 2014 before pulling back to under $96 a barrel as the stock market rallied. Russia is one of the largest oil producers in the world, and global oil supplies could be disrupted if NATO targets Russia with significant oil sanctions.
“Oil prices are a problem, as they act like a tax and will certainly have an impact on economic growth, especially if financial conditions tighten further,” says Cliff Hodge, chief investment officer for Cornerstone Wealth.
Investors have also piled into gold in 2022, which is commonly viewed as a safe-harbor commodity during times of market volatility and uncertainty. Spot gold prices hit $1,955 per ounce Feb. 24, their highest level in over a year.
How War Affects Cryptocurrency Prices
Bitcoin (BTC) and other cryptocurrency prices dropped the morning of Feb. 24. Some crypto investors have said Bitcoin’s limited supply makes it like digital gold and have argued that crypto should be a safe-harbor investment and a hedge against inflation. In reality, Bitcoin prices have been highly correlated with stock prices in recent months.
Nigel Green, chief executive and founder of deVere Group, says the market is treating Bitcoin more as a risk asset than a safe harbor, which is reflected in its weakness as the full-scale invasion launched.
“I think we might see it revert to being regarded as a safe haven asset as the situation in Ukraine develops because it is unconfiscatable — which could become extremely important as centralized authorities take drastic steps,” Green says.
[See: Will the Stock Market Crash in 2022? 10 Risk Factors.]
Stock Market Outlook
The S&P 500 initially dropped more than 2% on the morning of Feb. 24 and is down 10.6% year to date in 2022, even after its late-day rebound. If history is any indication, the Russia-Ukraine sell-off may prove to be short-lived.
“From a market perspective, most geopolitical events are sharp but short-lived, with volatility creating opportunity,” Hodge says.
In fact, since 1941, the S&P 500 has averaged a total drawdown of 5% following 21 major geopolitical events, including the Pearl Harbor attack, the assassination of President John F. Kennedy and the September 11 terrorist attacks. Despite the initial market volatility, the S&P 500 has subsequently taken an average of only 45 days to fully recover those initial losses.
Bill Adams, chief economist for Comerica Bank, says higher energy prices may be a modest headwind for U.S. economic growth in 2022, but the Ukraine conflict has not meaningfully changed his positive economic outlook.
“Even with new growth headwinds, the U.S. economy should still grow solidly in 2022 with real GDP of over 3%,” Adams says. “U.S. growth this year should be supported by less drag from the pandemic and consumers dipping into the $2+ trillion in savings they accumulated since the start of the pandemic — these factors will likely matter more for the U.S. economy than the Russia-Ukraine conflict,” he adds.
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How Do Conflicts and War Affect Stocks? originally appeared on usnews.com
