Stock markets are places where investors can buy and sell stocks, such as shares and bonds. A stock represents a piece of a company, and when an investor buys a stock, they become a shareholder because they have a share in any profits the company might make.
Once a company goes public — meaning it’s listed on a stock exchange — trading can start, and the value of its shares will rise and fall according to how much investors and traders believe them to be worth.
Stock markets are volatile and unpredictable. They fluctuate according to the state of the economy, which is affected by factors such as interest rates, exchange rate fluctuations, political upheaval and current events, like wars.
The recent war in Ukraine has affected financial markets across the world in different ways. In this article, we’ll explain how global markets have been impacted by the war, talk about which other wars have affected stock markets and give tips for investors.
What does the war in Ukraine mean for the stock market?
When there’s uncertainty in the market, stocks fall — and one of the biggest causes of stock market uncertainty is war. A week after Russia began its military invasion of Ukraine, the Guardian reported that stock markets across the world had plummeted.
However, history has shown us that while wars can temporarily shake up stock markets, this doesn’t usually mean long-term consequences for investors.
Read on to find out more about the financial implications of the war in Ukraine.
How is the war in Ukraine affecting the global economy?
It’s unlikely that the conflict will be resolved any time soon, meaning there could be higher stock market volatility in the coming weeks, due to increased uncertainty.
As well as contributing to increased short-term volatility, the war in Ukraine will slow global growth and raise inflation.
Disruption to Russian and Ukrainian energy exports is contributing to rises in oil and gas prices, globally. Russia supplies ten per cent of the world’s gas, and energy prices are currently at an all-time high, with oil exceeding the $130 per barrel mark for the first time since 2008. And, if Russian oil exports are halted, energy prices could increase further.
Currency and commodity markets have also shown signs of turbulence as a result of the conflict in Ukraine.
Additionally, the way in which Russia responds to western sanctions and restrictions on exports of technologies used by its military could influence the global economy and stock markets. Some have even expressed concerns about recessions for the US and European economies.
How is the war in Ukraine affecting the Russian economy?
In contrast to the above, some economists would argue that while Russia’s economy may be the eleventh largest in the world, it’s 20 times smaller than the US’s and 15 times smaller than China’s, so is unlikely to be big enough to affect global markets and economic growth. Although, widening sanctions could result in the country suffering significant economic damage, with Russia itself at risk of recession.
Following the sanctions imposed by the West, the Moscow stock exchange closed, while the rouble fell to record lows.
What are some of the sanctions that have been imposed on Russia?
- The UK is to ban all Russian oil imports by the end of the year
- The EU has unveiled a new strategy to split from Russian energy
- On 8th March, President Biden banned the import of Russian oil, coal and liquified natural gas to the US, as well as new American investment in Russia’s energy sector
The G7 nations are also planning to strip Russia of its “Most Favoured Nation” status.
How is the war in Ukraine affecting the European economy?
European countries are likely to experience more difficulties than those elsewhere in the world, because they depend on Russia more for energy.
As stated above, Russia supplies ten per cent of the world’s energy, but nearly 50 per cent of it is consumed in Europe. Western Europe — in particular, Germany — will struggle to find an easy alternative source of energy to replace Russian natural gas. Households and businesses are already feeling the impact of this. In both the UK and the EU, wholesale gas prices have reached record highs, with gas prices in the UK rising above 500p a therm and causing a number of household energy suppliers to go bust. But it’s not only mining and energy stocks that have been affected by the soar in commodity prices. Wheat prices reached a 14-year high and corn prices rose to their highest level in eight years.
European stock exchanges recorded big falls as a result of the war in Ukraine, including the London stock market, which suffered its biggest weekly losses since the start of the COVID-19 pandemic in March 2020. The French, German and Italian stock markets also fell after Russia invaded Ukraine, with the Dax in Frankfurt seeing its lowest levels since late 2020 and Italy’s index falling to its lowest level in more than a year.
How is the war in Ukraine affecting the US economy?
Although it’s likely that Europe’s economy will suffer, the US economy appears to be relatively insulated from the war.
US stocks on Wall Street did fall as a result of Russia’s invasion of Ukraine, and consumers and individual investers are likely to see a rise in energy prices which will lead to inflation, but some experts say short-term stock market volatility and additional inflation pressures won’t be enough to cause a recession in the US.
Higher energy prices could see North American energy companies benefitting from the conflict, with stocks performing even better than have been over the past year.
Which other wars have affected stock markets?
The past century has seen a trend in stock markets, whereby there’s a sharp rise following a prolonged war. Before a big surge, there are often pauses or sharp dips in the markets, as demonstrated by the following:
- At the end of the Second World War, the markets rose for a short while, then experienced a prolonged correction for a few years, before rising sharply from 1949 until 1966.
- For six years after the Vietnam War, inflation and high gas prices were a problem, but then the market boomed from 1982 to 2000.
- During the war in Afghanistan from 2002 to 2021, there were huge stock market swings. But those who kept their investments for the duration benefitted from substantial gains.
Tips for stock market investors
Investing in the stock market isn’t for the faint-hearted. You have to be prepared to take risks and understand that a worthwhile investment takes time and effort.
But as long as you’re willing to study the market in detail and you can hold your nerve while the market fluctuates, you can benefit from substantial rewards.
If you decide that investing in stocks and shares is right for you, the first thing to do is to understand what it is that makes stock prices go up or down — some of which we mentioned earlier.
Also, with any type of investment, it’s important to realise that you have to commit to the long term if you want to make serious money. Typically, the longer you invest, the better return you will get.
If you’re worried about risk, diversification could be the way to go. Diversification is a risk-management strategy that combines a variety of investments within a portfolio. Having a mix of asset types and investment vehicles is less risky than investing in a single asset. You could also consider investing in ‘safer’ assets, like gold, government bonds or currencies such as the dollar and yen.
First-time investors might want to consider hiring a financial advisor, who can outline their investment options and help determine their risk levels.
Summary
Stock markets are volatile and unpredictable. They fluctuate according to the state of the economy, which is affected by factors such as interest rates, exchange rate fluctuations, political upheaval and current events, like wars.
Stocks fall when there’s uncertainty in the market — and one of the biggest causes of stock market uncertainty is war.
When Russia invaded Ukraine, stock markets across the world fell, but history has shown us that while wars can temporarily shake up stock markets, this doesn’t usually mean long-term consequences for investors.
The recent war in Ukraine has affected different economies in different ways:
- The global economy — Increased uncertainty could mean higher stock market volatility in the coming weeks, as well as slower global growth and rising inflation. Oil and gas prices have risen since Russia’s invasion and if Russian oil exports are halted, energy prices could increase further. Currency and commodity markets have also shown signs of turbulence as a result of the conflict in Ukraine. Some economists have expressed concerns about recessions for the US and European economies.
- The Russian economy — Other economists would argue that while Russia’s economy may be the eleventh largest in the world, it’s unlikely to be big enough to affect global markets and economic growth. However, widening sanctions could result in Russia itself suffering significant economic damage, with the risk of recession. Following the sanctions imposed by the West, the Moscow stock exchange closed, while the rouble fell to record lows.
- The European economy — European countries depend on Russia more for energy, so they’re likely to experience more difficulties than those elsewhere. In both the UK and the EU, wholesale gas prices have reached record highs, as have wheat and corn prices. European stock exchanges recorded big falls as a result of the war in Ukraine.
- The US economy — The US economy appears to be relatively insulated from the war, although US stocks did fall as a result of Russia’s invasion of Ukraine, and consumers and individual investors are likely to see a rise in energy prices, which will lead to inflation. However, some experts say short-term stock market volatility and additional inflation pressures won’t be enough to cause a recession in the US.
The Second World War, the Vietnam War and the war in Afghanistan also had an impact on stock markets, with a sharp rise being seen after each one.
If you’re considering investing in the stock market, be prepared to take risks and understand that a worthwhile investment takes time and effort. You need to understand what it is that makes stock prices go up or down and you have to commit to the long term if you want to make serious money. If you’re worried about risk, diversification could be the way to go or you could consider investing in ‘safer’ assets, like gold, government bonds or currencies such as the dollar and yen. First-time investors might want to consider hiring a financial advisor.