The latest chapter of a long history of military conflict in the Middle East began on Oct. 7, 2023, when Hamas militants launched an unprecedented surprise attack on Israel. Israel responded by declaring war on Hamas shortly thereafter. In the months that have followed, tensions between the U.S. and Iran have escalated after confrontations between Iranian-backed militia groups and the U.S. and its allies.
Meanwhile, the conflict between Russia and Ukraine is approaching its two-year anniversary with no end in sight. After crashing about 30% in the first year of the conflict, The World Bank expects Ukraine’s gross domestic product to have grown by 3.5% in 2023. The soaring costs of war coupled with severe economic sanctions from around the world have also weighed heavily on Russia’s economy. U.S.-listed stocks such as Starbucks Corp. (ticker: SBUX), Exxon Mobil Corp. (XOM), McDonald’s Corp. (MCD) and British American Tobacco PLC (BTI) have completely shut down their Russian operations since the Ukraine invasion began.
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The conflicts in Ukraine and the Middle East, coupled with elevated geopolitical tensions between the U.S. and China surrounding Taiwan, could have major implications for the global economy in 2024 and beyond. Issues such as international supply chains and trade, inflation and cost of living, food prices and insecurity, energy market volatility, defense spending and even the 2024 U.S. presidential election are all on investors’ minds.
In this period of heightened global conflict and uncertainty, 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 the stock market has reacted to previous crises.
Stocks That Fall in Times of Conflict
International travel and leisure stocks are often among the worst performers during times of conflict due to market expectations of downturns in travel demand. In the past six months, Marriott Vacations Worldwide Corp. (VAC) shares are down more than 30% and shares of Norwegian Cruise Line Holdings Ltd. (NCLH) are down about 19%.
In addition to travel stocks, U.S.-listed stocks with direct exposure to Israel, Russia, Ukraine or China have been pressured. Israeli stocks ICL Group Ltd. (ICL), Mobileye Global Inc. (MBLY) and Tower Semiconductor Ltd. (TSEM) have severely underperformed in the past six months. In 2022, VanEck completely liquidated its VanEck Russia ETF (RSX) and VanEck Russia Small-Cap ETF (RSXJ) after U.S.-listed Russian stocks crashed and were halted or delisted. BlackRock did the same with its iShares MSCI Russia ETF (ERUS). Russian stocks Gazprom, OZON and YANDEX were ultimately delisted.
If China eventually takes military action in Taiwan, U.S.-listed Chinese stocks such as PDD Holdings Inc. (PDD), Alibaba Group Holding Ltd. (BABA) and NetEase Inc. (NTES) could be exposed to similar risks. U.S. stocks with high exposure to China are also at risk, including Las Vegas Sands Corp. (LVS), Qualcomm Inc. (QCOM) and Monolithic Power Systems Inc. (MPWR). Semiconductor makers Nvidia Corp. (NVDA) and Advanced Micro Devices Inc. (AMD) rely on leading global chip foundry Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) to produce their high-end chips. If TSMC’s production is disrupted by war, AMD and Nvidia’s share price may follow Taiwan Semi’s stock price into the basement.
In addition to TSMC, U.S.-listed Taiwanese stocks include semiconductor stocks ASE Technology Holding Co. Ltd. (ASX) and United Microelectronics Corp. (UMC), as well as telecom stock Chunghwa Telecom Co. Ltd. (CHT).
Stocks That Can Benefit From Armed Conflict
Not surprisingly, leading defense stocks have performed relatively well in recent months. Shares of unmanned aerial vehicle company AeroVironment Inc. (AVAV) are up nearly 30% in the past six months. Military aircraft part-maker TransDigm Group Inc. (TDG) shares have traded higher by 32% since Hamas attacked Israel. Through Jan. 29 this year, the stock prices of defense giants RTX Corp. (RTX) and Textron Inc. (TXT) are up more than 7% each, while the S&P 500 is up just 3.3%.
In addition to defense stocks, conflicts in Russia and the Middle East put global oil supplies at risk. Oil prices have remained somewhat stable following the Hamas attack, but any escalation in the Middle East could send oil prices soaring. Higher oil prices could mean more profits and higher share prices for U.S. oil and gas companies, such as Targa Resources Corp. (TRGP), Schlumberger Ltd. (SLB) and Halliburton Co. (HAL).
[READ: 10 of the Best Stocks to Buy for 2024]
How War Affects Commodity Prices
War can have varying impacts on global commodity prices depending on the regions involved. Russia and Ukraine are among the world’s largest exporters of agricultural products, including wheat and corn. There are also complicated interactions among different commodity prices that can be affected by war. For example, cotton prices and oil prices are typically correlated. Oil prices also impact the cost of synthetic fibers, including spandex, polyester and nylon. Ukraine produces about half of the world’s sunflower oil, and Russia’s boreal forest is a major global supplier of lumber.
Nigel Green, CEO and founder of deVere Group, says an escalation of Middle East conflicts could easily affect the oil market, which is one of the biggest risks to the stock market in 2024.
“Any escalation could disrupt global oil supplies, leading to increased market volatility. Investors are closely monitoring the situation, as heightened tensions may have profound implications for energy prices and overall market stability,” Green says.
Investors have also historically purchased gold during times of conflict, which is commonly viewed as a safe-harbor commodity during times of market volatility and uncertainty. Spot gold prices surpassed $2,135 per ounce in December 2023, a new all-time high, but they have since fallen down to $2,031 as of Jan. 29.
How the Stock Market Has Reacted to Previous Crises
The good news for investors is that U.S. markets have mostly shrugged off geopolitical risks as investors focus more on the booming U.S. economy and the potential for a Federal Reserve pivot from interest rate hikes to rate cuts in the first half of 2024. U.S. GDP grew at a surprising 3.3% year over year in the fourth quarter, and investor concerns over an imminent U.S. recession have faded in the past year.
Bill Adams, senior vice president and chief economist for Comerica Bank, says U.S. recessions have historically begun when gas prices spike and interest rates rise.
“It would be very unusual to see a recession begin as gas prices and interest rates fall,” Adams says.
“Of course, this could all change if the Israel-Hamas war turns into a broader regional conflict, or if the Russia-Ukraine war disrupts global energy supplies again.”
John Lynch, chief investment officer for Comerica Wealth Management, says the market has historically been extremely resilient following crisis events.
“During previous periods of global escalations, including wars, pandemics and terrorist attacks, the financial markets have displayed relatively flexible tendencies supporting strategic allocations,” Lynch says.
LPL Financial recently looked at how the S&P 500 performed following roughly two dozen crisis events dating back to 1940, including major world events like the Kennedy assassination and 9/11. LPL found the S&P 500 typically saw a sharp sell-off the day a crisis event occurred but, assuming the subsequent year didn’t coincide with a recession, stocks rose an average of 9.2% in the subsequent 12 months.
“Other patterns that typically emerge involve heightened bids for ‘safe haven’ plays, including U.S. Treasurys, gold and the U.S. dollar, while equities and oil prices experience various forms of volatility,” Lynch says.
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How Do Conflicts and War Affect Stocks? originally appeared on usnews.com
Update 01/30/24: This story was previously published at an earlier date and has been updated with new information.
