Fisher Investments Reviews How Markets React to Regional Conflicts

Stocks Quickly Move Past Regional Conflicts

When new regional conflicts arise, it’s not uncommon for stocks to experience volatility as investors assess the economic fallout and probabilities of escalation. Each conflict is unique and can have different implications for local economies, commodities pricing, certain industries and more. However, as Exhibit 1 shows, the broader stock market typically looks beyond the conflict and is frequently positive in the 1-, 6- and 12-month period following the initial escalation. Moreover, when assessing the returns throughout the full duration of the conflict, the frequency of positivity increases.

Exhibit 1: Regional Conflicts Have Limited Market Impact

Source: Global Financial Data, as of 11/20/2024. S&P 500 Total Return Index cumulative returns, daily, 10/28/1956-10/7/2024. Sampling of regional conflicts since 1956.

Exhibit 2 provides a closer look at how global stocks have responded to some of the conflicts above. While the initial shock can negatively affect markets, stocks quickly digest geopolitical conflict and, in most cases, push higher. In our view, this indicates fundamental factors—such as earnings growth and economic cycles—tend to have a more substantial impact on market trends than geopolitical events.

Exhibit 2: Markets Rebound Quickly

Source: FactSet, as of 11/20/2024. MSCI World Price Index, daily, 1/1/1990 – 12/31/1992, 1/1/2003 – 12/31/2003, 1/1/2006 – 12/29/2006, and 1/1/2023 – 11/14/2024.

This trend also highlights the risk associated with making knee-jerk investment decisions. Unfortunately, geopolitical conflicts are one of many emotional reasons investors may seek to get out of the market. However, while stocks in the short term have historically been more volatile than other asset classes—such as bonds—they’ve also achieved higher long-term returns. In Fisher Investments’ view, stomaching this short-term volatility, whatever the cause, is a necessary part of long-term investment success.

Regional Conflicts Have a Limited Impact on Global GDP

Unlike the widespread impact of a world war, regional conflicts by definition remain geographically confined, which limits their impact on markets. One important reason for this is because most regional conflicts involve countries with relatively small pieces of global gross domestic product (GDP).

Exhibit 3 illustrates the percentage of global GDP accounted for by the West Bank and Gaza, Israel, Ukraine and Russia. War has had significant and devastating effects on most of these economies. However, together they represent only about 2.6% of global GDP, which limits their overall influence on the world economy^[i].

Exhibit 3: Recent Conflicts Have Limited Market Impact

Source: International Monetary Fund (IMF), as of 10/24/2024. Percent contribution to 2024 world GDP, current prices. Based on IMF’s World Economic Outlook October 2024 figures. West Bank and Gaza figure from 2023; no data available for 2024.

It's important to recognize that the economy is highly complex and adaptable to various circumstance. Take, for example, the Russia-Ukraine conflict. Russia is one of the largest oil producers in the world, and many speculated that the sanctions imposed by Western countries would significantly hinder its ability to produce and sell oil. This speculation led to a spike in oil prices in February 2022, and fears of an impending recession grew. However, many investors underestimated Russia's ability to adjust its supply chain, allowing it to sell more oil to countries that did not participate in the sanctions, such as China and India. By the end of the summer 2022, oil prices had fallen below pre-invasion levels, and the anticipated recession never materialized^[ii].

War is tragic. While regional conflicts can initially unsettle markets, history demonstrates their effects are often short-lived, allowing markets to recover when feared outcomes do not materialize. By focusing on economic fundamentals and maintaining discipline in the face of highly emotional developments, investors can better navigate these uncertainties.

Want to Dig Deeper?

In this article, we discussed how stocks respond to regional conflicts, why the market impact of regional conflicts is typically brief, and how the scale of these conflicts shapes their economic effects.

For more analysis on how regional conflicts impact markets, you can read Fisher Investments’ MarketMinder article, "The Latest on Israel, Iran and the Middle East's War."

For more market insights from Fisher Investments, read our latest articles.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. The results for individual portfolios and for different periods may vary depending on market conditions and the composition of the portfolio. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. Nothing herein is intended to be a recommendation. The opinions expressed are subject to change without notice.

[i] Source: International Monetary Fund (IMF), as of 10/24/2024. Percent contribution to 2024 world GDP, current prices. Based on IMF's World Economic Outlook October 2024 figures.
[ii] Source: Factset, as of 11/20/2024. Brent Oil Prices from 2/01/2022 to 12/31/2022.