Key takeaways
The Russia-Ukraine war is well into its third year with fighting generally resulting in a standoff.
The conflict between Israel and Hamas has resulted in a significant human toll, as regional military tensions continue.
Despite growing global concern centered on these troubling geopolitical hotspots, capital markets remain generally unaffected to this point.
The geopolitical climate continues to be marred by hotspots in eastern Europe and the Middle East. The ground war begun by Russia in 2022 intent on capturing Ukrainian territory continues, with Ukraine supported by most NATO countries. At the same time, Israel continues its war with Hamas, primarily centered in Gaza. There appear to be no immediate prospects for a quick end to either conflict.
Along with the tragic human toll resulting from both conflicts, there are other costs that are closely monitored. Each conflict appeared to create temporary issues in commodities markets, but they generally haven’t persisted. However, the wars have the potential to serve as an external event that could distract investors from more fundamental factors such as economic developments and earnings trends.
Geopolitical events like the Russia-Ukraine and Israel-Hamas conflicts force government policymakers, central bankers and corporate leaders to contend with unique variables on a scale not experienced in decades. Nevertheless, investors appear to remain more focused on factors such as central bank policies, the interest rate environment, economic growth and corporate earnings. Is it possible that current geopolitical conflicts could eventually cause issues for the economy and capital markets as well?
Although it appeared Russia made some advances in the spring, the situation seems to have returned to a stalemate in recent months. Supported by U.S. and European equipment and financial backing, Ukraine managed to bolster its efforts to defend territory. Nevertheless, Russia continues to inflict great damage with air strikes on cities and on Ukraine’s power supply. Nevertheless, neither side seems to be close to achieving its objectives. “Russia is struggling against the backdrop of a supreme leader [Putin] who is bound and determined in his objective of taking military control over Ukraine,” says David Bridges, senior geopolitical and security advisor at Fidelity Management and Research Company. Bridges, who was a former operations officer at the CIA, including significant time in the former Soviet Union and Eastern Europe, says Putin may have deceived himself about the level of effort that was required to potentially claim a victory in Ukraine. Yet Putin has remained persistent in maintaining military pressure despite significant casualties that have accumulated over the war’s first two years.
In late 2023 and early 2024, additional U.S. funding ran into Congressional roadblocks. However, in April 2024, a breakthrough occurred, and Congress approved a $61 billion aid package to support Ukraine’s military efforts. In addition, NATO allies have recently voiced strong support for Ukraine. However, future U.S. support for Ukraine may hinge on the outcome of the election, as some prominent Republicans have questioned continued funding for Ukraine.
The Israel-Hamas conflict is the latest in a long series of Middle East military encounters that occur frequently. The situation intensified following an October 2023 attack on Israeli territory by Hamas. Israel responded with its own invasion of the Gaza Strip, using ground troops and massive aerial bombardment. In response, Houthi rebels have attacked commercial and military ships in the Red Sea, a major navigation waterway leading to the Suez Canal. This disrupted shipping activity, particularly affecting the movement of oil supplies. The war’s potential to expand by involving another Israeli enemy, Hezbollah, based in the border country of Lebanon, could complicate matters. That prospect raises concerns that the Middle East situation could become more widespread, which might ultimately have more global economic ramifications. The April funding package for Ukraine also directed funding to Israel and humanitarian aid for residents of the Gaza Strip.
One result of Russia’s aggressive stance toward Ukraine is an expansion of NATO membership. Finland, which shares an 830-mile border with Russia, was accepted as part of the alliance in 2023. Sweden was added in 2024.
Bridges believes Russia’s invasion of Ukraine could represent a new era, or second Cold War, that will differ distinctly from the previous three decades. In the new environment, economic weapons, much like those being imposed on Russia today, may be a primary form of combat, as both sides seek to avoid actual military conflict between the U.S. and Russia.1
The situation in the Middle East is more complex. Many countries have objected to the scope of Israel’s Gaza attacks. There is a risk that more countries in the Middle East that are aligned against Israel’s interests might choose to get involved, which could broaden the conflict’s scope.
Given the inter-connected relationship among economies across the globe, concerns about the worldwide economic fallout persist. Energy is a key part of the equation on multiple fronts. For example, Russia provides approximately 10% of the world’s oil output. Russia, in coordination with the Organization of Petroleum Exporting Countries (OPEC)+, has implemented supply cuts.2
“If global tensions continue to escalate, this would clearly present a negative event risk that could have a detrimental impact on markets, at least on the margins,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management.
The impact is significant for Europe. For example, prior to the war, Russia supplied about one-third of European natural gas and about one-quarter of its crude oil imports.3 “Europe benefited from two consecutive mild winters that helped to moderate energy demand” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Nevertheless, the contributes to Europe’s economic challenges.”
Concerns again rose about the direction of oil prices after the Israel-Hamas war began in October 2023, particularly when attacks on container ships on the Red Sea occurred. Those attacks prompted many shippers to divert traffic to much longer routes away from the Red Sea. Oil prices have risen only modestly as a result. Oil prices remained in the $75-$90 range throughout 2024. “The biggest concern is whether the conflict more directly involves Iran. That could create some pressure on oil supplies and prices,” say Haworth. Despite the concerns, Haworth sees little risk of a 1970’s-style oil embargo by Middle Eastern oil producing countries opposed to Israel’s actions. “Many Middle Eastern countries are too dependent on the income from oil sales, so most can’t afford to cut production or deliveries in any significant way,” says Haworth.
Both Russia and Ukraine are major suppliers of wheat and other agricultural products to various parts of the world. 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 jumped briefly in May and June 2024 before again leveling off, with solid wheat production anticipated this growing season.
“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 Wealth Management. Yet he points out that there is a greater risk for multinational companies. “If global economies slow as a result of the current conflicts, it may have a negative impact on business activity and for American companies.”
From an investment perspective, the current conflicts have been overshadowed by other developments, such as the state of the U.S. economy, monetary policy, and corporate earnings. “If global tensions continue to escalate,” says Hainlin, “this would clearly present a negative event risk that could have a detrimental impact on markets, at least on the margins.”
Haworth notes that capital markets have generally been unaffected. “To this point, the market seems to be responding more to fundamental economic and monetary policy factors than by global military conflicts,” says Haworth. Potential future changes in the U.S. commitment to NATO, as talked about in this year’s election campaign, are too far out in the future to have a direct market impact today, says Haworth. “Capital markets won’t deal in guesses about what may come. 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. The first 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 major concern is that this war could broaden to include other Middle East nations.
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 have remained elevated since the start of the Israeli-Hamas conflict, but not spiked to previous levels. While the 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. By the end of 2022, stocks were on the rebound, and continue to move higher until pausing in August 2023. By the end of October, 2023, the three-month bull market pause was over, despite the onset of the Israeli-Hamas conflict. Stocks for the most part have moved in a positive direction since that time. “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.
What should investors consider when seeking emerging market exposure to the world’s second-largest economy?
Up more than 60% from October 2022 through mid-July 2024, the S&P 500 flirted with a market correction in early August.
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