How Do Conflicts and War Affect Stocks?

Explosions and missile strikes hit Kyiv, Ukraine’s capital and other cities on the morning of February 24 as Russia started a deadly incursion into its neighboring nation. In 2022, global financial markets were weighed down by the impact of Russian military action in Ukraine and global retaliation measures against Russia.

Based on the West’s monetary response to Russia‘s invasion, Goldman Sachs reportedly predicted a 10% drop in Russia’s GDP this year. As a result of being excluded from the Society for Worldwide Interbank Financial Telecommunications, or SWIFT, Russian banks have a more difficult time processing international payments. All of Russia’s foreign reserves have been frozen by the United States, European Union, France, Germany, Italy, the United Kingdom, and Canada. The majority of Russia’s $630 billion in reserves were stashed away in foreign institutions before the invasion.

U.S. corporations like Starbucks Corp. (ticker: SBUX), Exxon Mobil Corp. (ticker: XOM), McDonald’s Corp. (ticker: MCD), and British American Tobacco PLC (ticker: BTI) have all ceased operations in Russia since the invasion of Ukraine began.

Stocks That Drop When War Breaks Out

Investors now have a good idea of which stocks are likely to do well and which are likely to underperform during times of global military conflict. Online travel stock Expedia Group Inc. (EXPE), casino operator Caesars Entertainment Inc. (CZR), and cruise line operator Carnival Corp. have all been among the worst performers in the S&P 500 since the invasion of Ukraine began on February 24.

Conflicts and War Affect Stocks
Conflicts and War Affect Stocks

Not only have airlines and hotels been hurt hard by the news out of Ukraine, but so have banks. Despite the increase in interest rates, investors are worried that the inflation caused by the Russian invasion will eventually lead to a slowdown in credit growth and a subsequent recession in the United States. Since the invasion of Ukraine began, regional U.S. banks such as Signature Bank (SBNY) and PacWest Bancorp (PACW) have been among the poorest performers on the market. Similarly, investors have sold off shares of mortgage finance companies like Rocket Companies Inc. (RKT) and Walker & Dunlop Inc. (WD) since the invasion of Ukraine began, on the assumption that higher interest rates will reduce mortgage demand.

Stocks That Can Benefit From Armed Conflict

It’s no surprise that top defense stocks have done well so far in 2022. Since the invasion began, shares of L3Harris Technologies Inc. (LHX), a provider of electronic systems for the military, have risen by 6.6%. Since then, Northrop Grumman Corp. (NOC) stock has risen by 18.7 percent. When compared to the S&P 500’s decline of 18.2% as of June 10th, the stock prices of military industry titans Raytheon Technologies Corp. (RTX) and Lockheed Martin Corp. (LMT) are up 4.5% and 10.7%, respectively.

The Impact of War on Goods Prices

Rising crude oil prices have been a major factor in the recent surge of energy sector stocks. Through June 10th, the price of a barrel of Brent crude oil had risen by almost 57%, to over $122. This was the first time this has happened since 2008. Among the world’s top oil producers, Russia is a formidable force. Both the United States and the United Kingdom have vowed to stop importing Russian oil and natural gas and to halt all imports of Russian energy by the end of 2022, respectively. A total of 90% of Russian oil imports into Europe will be banned by that time.

How War Affects Prices of Cryptocurrencies

Since the invasion began, cryptocurrency prices have fallen dramatically, with Bitcoin’s down by 19%.  Some cryptocurrency investors have stated that Bitcoin and other cryptocurrencies could be considered a safe haven investment and a hedge against inflation because of their limited quantity. It’s a fact that Bitcoin’s value has been significantly associated with the value of stocks in recent months.

According to Nigel Green, CEO, and founder of deVere Group, Bitcoin is being viewed by investors as a risk asset rather than a safe place, and this is reflected in the currency’s decline as the full-scale invasion begins. As the situation in Ukraine worsens, Green predicts that people will once again view it as a safe haven asset because it cannot be confiscated. This might become crucial if central authorities adopt severe measures.

Future of the Stock Market

Since the invasion of Ukraine began, the S&P 500 has dropped by 9 percent. Comerica Bank’s chief economist Bill Adams believes that while the situation in Ukraine has not significantly altered his optimistic economic prognosis, increasing energy prices may be a slight impediment to U.S. economic growth in 2022.

Adams predicts that real GDP growth for the United States economy will top 3% in 2022, despite the fact that the economy will face fresh growth hurdles. He predicts that the Russia-Ukraine conflict won’t be as significant to the U.S. economy this year as the lessened drag from the virus and consumers drawing down the $2 trillion in savings they accrued since the start of the outbreak.

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