Israel-Hamas Conflict: Market Impact
Investors today find themselves preoccupied with numerous concerns, but one issue seems to be flying under the radar. The Israel-Hamas conflict, which ignited in early October, initially sent shockwaves through global financial markets. Stocks nosedived, the Israeli shekel depreciated, and oil prices surged. On the first trading day following the war’s commencement, the US bond market, observing Indigenous Peoples’ Day, reacted by rallying, as investors rushed to safeguard their portfolios from geopolitical uncertainty.
However, these initial anxieties have since dwindled. While some investors feared that the conflict might expand to significant oil-producing nations, further constricting the global oil supply, oil prices have retreated and now remain well below the September peaks when output cuts by Saudi Arabia and Russia shook the market.
Meanwhile, Treasury yields are fluctuating at levels not witnessed in over a decade, suggesting that the brief flight to safety that occurred at the war’s onset has not experienced a resurgence. Typically, government bonds are considered safe havens during times of economic uncertainty.
So, what’s causing this apparent disregard for the Israel-Hamas conflict? Investors believe that Wall Street is currently more focused on what they perceive as immediate threats: the Federal Reserve’s drive to raise interest rates and the ongoing earnings season.
“We’re in a state of information overload,” commented Yung-Yu Ma, the Chief Investment Officer at BMO Wealth Management.
As of now, about 24% of the companies listed in the S&P 500 have released their third-quarter results, with 78% of them surpassing expectations, according to FactSet.
The forthcoming earnings reports from tech giants such as Alphabet, Amazon, Microsoft, and Meta Platforms, which have played a significant role in this year’s market performance, are under scrutiny this week. Some investors believe that this earnings season could reinvigorate the market rally, especially after a period of uncertainty triggered by a lack of corporate news in recent months.
During the first half of the year, US stocks exhibited remarkable strength, defying challenges like regional banking turmoil, a US debt ceiling crisis, and concerns of an impending recession. The fervor for artificial intelligence led traders to drive up the prices of major tech stocks to extraordinary heights, enabling the benchmark S&P 500 to approach a level close to a new all-time high in July.
However, this momentum has waned, as economic data indicates limited signs of cooling despite 11 interest rate hikes over the past 19 months. A resurgence of inflation has raised concerns that the Federal Reserve may prolong elevated interest rates after elevating them to the highest level in over 22 years. These fears solidified following the September Federal Reserve meeting, during which the possibility of additional rate hikes was left on the table, and the Fed signaled its intent to maintain higher rates throughout the next year.
Presently, the markets appear considerably less optimistic. The S&P 500 is on track to record its third consecutive monthly decline, while the Dow Jones Industrial Average has relinquished all the gains it accrued this year. Investors warn that these declines could persist if the Israel-Hamas conflict intensifies or if the economy buckles under the strain of upcoming rate hikes, or if both scenarios materialize.
Wall Street hasn’t entirely dismissed the potential influence of the Israel-Hamas war on financial markets. In recent weeks, traders have sought refuge in various assets, including gold, utility stocks, and Bitcoin, as a safeguard against potential volatility if the conflict escalates.
David Bahnsen, the Chief Investment Officer at The Bahnsen Group, noted that an unforeseen surge in Middle East conflict could lead to a substantial 7-10% stock market decline. In such a scenario, investors might seek the haven of bonds, resulting in a retreat in yields, which is a typical response during periods of geopolitical tension.
To prepare for possible future yield declines, Yung-Yu Ma’s firm increased its allocation to longer-term government bonds this week. He remarked that achieving significant increases in these yields from the current levels may be challenging until the geopolitical uncertainties dissipate.
