The most recent episode in the enduring saga of military clashes in the Middle East commenced on October 7, 2023, when Hamas militants launched an unexpected and unprecedented assault on Israel. In response, Israel promptly declared war on Hamas. In the ensuing months, tensions between the U.S. and Iran escalated due to confrontations involving Iranian-backed militia groups and the U.S. and its allies.
Simultaneously, the conflict between Russia and Ukraine is on the verge of marking its two-year anniversary with no resolution in sight. Despite a 30% crash in the first year, the World Bank anticipates Ukraine’s gross domestic product to have grown by 3.5% in 2023. However, Russia’s economy has been significantly impacted by the soaring costs of war and severe economic sanctions imposed globally. Various U.S.-listed stocks, including Starbucks Corp. (SBUX), Exxon Mobil Corp. (XOM), McDonald’s Corp. (MCD), and British American Tobacco PLC (BTI), have completely ceased operations in Russia since the commencement of the Ukraine invasion.
The ongoing conflicts in Ukraine and the Middle East, along with heightened geopolitical tensions between the U.S. and China concerning Taiwan, pose potential major consequences for the global economy in 2024 and beyond. Investors are grappling with concerns related to international supply chains, trade, inflation, the cost of living, food prices, insecurity, energy market volatility, defense spending, and even the 2024 U.S. presidential election.
Amid this period of elevated global conflict and uncertainty, here are key considerations for investors regarding how markets typically respond to war and armed conflict:
Stocks Reacting to Conflict
During times of conflict, international travel and leisure stocks often suffer due to anticipated declines in travel demand. Over the past six months, shares of Marriott Vacations Worldwide Corp. (VAC) have declined by more than 30%, and Norwegian Cruise Line Holdings Ltd. (NCLH) has seen a decrease of around 19%.
U.S.-listed stocks with direct exposure to Israel, Russia, Ukraine, or China have faced pressure. Israeli stocks, including ICL Group Ltd. (ICL), Mobileye Global Inc. (MBLY), and Tower Semiconductor Ltd. (TSEM), have significantly underperformed. The Ukraine conflict led to the liquidation of VanEck’s VanEck Russia ETF (RSX) and VanEck Russia Small-Cap ETF (RSXJ) in 2022. Similarly, BlackRock did the same with its iShares MSCI Russia ETF (ERUS), and Russian stocks Gazprom, OZON, and YANDEX were eventually delisted.
Potential military action by China in Taiwan could expose U.S.-listed Chinese stocks like PDD Holdings Inc. (PDD), Alibaba Group Holding Ltd. (BABA), and NetEase Inc. (NTES) to similar risks. U.S. stocks with significant exposure to China, such as Las Vegas Sands Corp. (LVS), Qualcomm Inc. (QCOM), and Monolithic Power Systems Inc. (MPWR), may also be at risk. Semiconductor makers Nvidia Corp. (NVDA) and Advanced Micro Devices Inc. (AMD), reliant on Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) for high-end chips, could face challenges if TSMC’s production is disrupted by war.
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 Benefiting from Armed Conflict
Not surprisingly, leading defense stocks have seen relatively positive performance in recent months. Shares of unmanned aerial vehicle company AeroVironment Inc. (AVAV) have risen by nearly 30% in the past six months. Military aircraft part-maker TransDigm Group Inc. (TDG) has experienced a 32% increase in shares since the Hamas attack on Israel. As of January 29 this year, the stock prices of defense giants RTX Corp. (RTX) and Textron Inc. (TXT) have risen by more than 7%, while the S&P 500 has increased by just 3.3%.
Apart from defense stocks, conflicts in Russia and the Middle East pose a threat to global oil supplies. While oil prices have remained relatively stable following the Hamas attack, any escalation in the Middle East could lead to a surge in oil prices. Higher oil prices could result in increased profits and higher share prices for U.S. oil and gas companies, including Targa Resources Corp. (TRGP), Schlumberger Ltd. (SLB), and Halliburton Co. (HAL).
Impact on Commodity Prices
The impact of war on global commodity prices varies based on the regions involved. Russia and Ukraine are major exporters of agricultural products, including wheat and corn. Complex interactions among different commodity prices can be affected by war, such as the typical correlation between cotton prices and oil prices. Ukraine, producing about half of the world’s sunflower oil, and Russia’s boreal forest, a significant global lumber supplier, are also influenced.
Nigel Green, CEO and founder of deVere Group, highlights that an escalation of conflicts in the Middle East could impact the oil market significantly, posing one of the biggest risks to the stock market in 2024. Increased tensions may disrupt global oil supplies, leading to heightened market volatility.
Investors have historically turned to gold during times of conflict, considering it a safe-harbor commodity amid market volatility and uncertainty. Spot gold prices reached a new all-time high of $2,135 per ounce in December 2023 but have since fallen to $2,031 as of January 29.
Historical Reactions of the Stock Market to Crises
Encouragingly for investors, U.S. markets have largely disregarded geopolitical risks, focusing instead on the robust U.S. economy and the potential for a Federal Reserve pivot from interest rate hikes to rate cuts in the first half of 2024. The U.S. GDP grew unexpectedly by 3.3% year over year in the fourth quarter, easing concerns about an imminent U.S. recession in the past year.
Bill Adams, senior vice president and chief economist for Comerica Bank, emphasizes that U.S. recessions historically commence when gas prices spike and interest rates rise. Adams notes the rarity of a recession starting as gas prices and interest rates fall. However, he acknowledges the potential for a shift if the Israel-Hamas war expands 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, points out the market’s historical resilience following crisis events. During past periods of global escalations, including wars, pandemics, and terrorist attacks, financial markets have demonstrated flexibility, supporting strategic allocations. LPL Financial’s analysis of the S&P 500’s performance following roughly two dozen crisis events dating back to 1940, including major world events like the Kennedy assassination and 9/11, revealed a typical sharp sell-off on the day of the crisis event. However, assuming the subsequent year didn’t coincide with a recession, stocks rose an average of 9.2% in the following 12 months. Lynch also mentions patterns such as increased 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.