Key takeaways
An escalation in global conflicts raises questions about potential economic and market ramifications.
The conflict between Israel and Hamas appears to be expanding into Lebanon, as Israel battles with Hezbollah.
In recent months, the Russia-Ukraine war intensified as Ukrainian troops pushed into Russian territory.
Fundamental factors like the U.S. economy’s strength, Federal Reserve monetary policy and corporate earnings tend to have the greatest impact on capital markets. Yet investors also keep an eye on geopolitical factors. Since early 2022, global conflicts have garnered headlines, with the most notable major confrontations in Eastern Europe and the Middle East. Although events such as these can contribute to global economic instability, the capital market impacts of these conflicts so far appear somewhat limited.
The Middle East conflagration has become increasingly fraught, with Iran and Israel now exchanging air strikes. Israel’s invasion of the Gaza Strip following the surprise October 7, 2023, attack by Hamas on Israel continues. In recent months, the battle extended into Lebanon, as Israel seeks to take out key leaders of another of its enemies, Hezbollah.
Additionally, there is the ongoing war between Russia and Ukraine, now well into its third year. “The conflict is taking on characteristics of the first World War, with little progress on the front lines and a significant human toll,” says David Bridges, senior geopolitical and security advisor at Fidelity Management and Research Company. Bridges, who was a former operations officer at the CIA, says “Russian President Vladimir Putin is using rhetoric to scare European leadership, and try to decouple Europe from the U.S.” Bridges believes fighting will continue with no major changes in the front lines, and no peace talks anytime soon.
Oil markets are considered susceptible to current tensions, given their proximity (Middle East, Russia) to major oil production regions. Although there’s been some fluctuation in oil prices, they’ve remained relatively stable in recent months. “Israel’s recent bombing in Iran spared nuclear and oil export facilities,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “The market interprets this more modest attack as a sign of potential de-escalating of the level of tensions between the two countries.” In the wake of the attack, the price of a barrel of oil dropped below $70. Oil prices have remained below $80/barrel since mid-summer. 1
“The key question regarding energy markets as we watch the Middle East conflict unfold is what happens if the war widens, if others start to get involved and does that impact oil prices a little more,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management.
“The key question for energy markets as we watch the Middle East conflict unfold is what happens if the war widens, if others start to get involved and does that impact oil prices a little more,” says Haworth. "Still, it’s important to remember that compared to other periods, oil prices today are on the low end of the scale.”
Both Russia and Ukraine are major global suppliers of wheat and other agricultural products. This contributed to a temporary spike in agricultural commodity prices in the early weeks following Russia’s invasion of Ukraine in February 2022. Wheat prices, for example, have remained in a much lower trading range since that time. 2
Source: WSJ.com. Price represents value of 5,000 bushels of wheat, traded on Chicago Board of Trade. As of October 25, 2024.
Haworth notes that given the duration of the Russia-Ukraine conflict, commodity markets have generally adjusted to changing conditions. “The only durable negative impact has been on German chemical companies, which are suffering due to the lack of cheap natural gas.”
Europe is likely to feel more impact than is the case domestically. “In the U.S., we’re a bit more insulated from the economic fallout from the conflicts compared to other parts of the world,” says Tom Hainlin, national investment strategist for U.S. Bank Asset Management.
From an investment perspective, current conflicts have been overshadowed by other underlying market and economic fundamentals. In the past two years, equity markets, in particular, have prospered. “Capital markets won’t deal in guesses about what may come,” says Haworth. “They’ll wait for something more concrete.”
Be sure to talk to your financial professional about what steps may be most appropriate for your circumstances.
The most prominent conflicts in the world today are found in two geographic regions. One is Eastern Europe, where Russia and Ukraine have been involved in a war since Russia first attacked Ukraine in February 2022. The second, more recent conflict, followed a surprise attack by Hamas against Israel. In short order, Israel responded with massive bombardments and by sending ground troops into the Gaza Strip. The war’s reach now appears to be expanding into Lebanon, as Israel seeks to attack a Hezbollah stronghold.
To this point, the economic impact of these conflicts has primarily been regional in nature. In the immediate aftermath of Russia’s invasion of Ukraine in early 2022, oil prices soared. That reflected efforts by western nations to place economic sanctions on Russia, which is a major oil supplier. However, that price spike was short-lived. Oil prices rose at the start of the Israeli-Hamas conflict, but haven’t spiked to previous levels, and stabilized in the $70 to $75/barrel range since then. While economic circumstances are extremely difficult for countries that are targeted in the current conflicts, the global impact has been muted. The U.S. economy continues to show significant stability despite global conflicts.
Stocks suffered through a bear market in 2022, though much of that was attributed to a changing economic environment. Most notably, the decision by the Federal Reserve to raise short-term interest rates beginning in early 2022 altered the investment landscape. Since late 2022, stocks recovered considerable ground. “The risk of an Israel-Iran conflict does raise greater concerns that Middle East military action could become more widespread,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. However, Haworth notes that the global conflicts currently aren’t having a significant impact on investor sentiment.
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