Fred A. from Georgetown, DE asks: Hi Mitch, I’ve been feeling pretty concerned about the Israel-Hamas conflict escalating into a full-blown war. There are humanitarian implications, but it also feels like it can send shockwaves around the global economy like the Russia-Ukraine war has. What are your latest thoughts on this crisis? Thank you.
Mitch’s Response:
Thank you for writing. The terrorist attack on Israel and the escalations that have happened since are certainly disheartening, and you’re right that the humanitarian toll is awful and only likely to get worse. There’s surely a lot to cover with regard to this conflict, but I’ll stay in my lane here and focus just on markets and the global economy.1
For the first part of my answer, I just want to focus on history. You and most readers are likely aware that conflict in this region of the world has been ongoing for decades, so we have a handful of historical crises we can cite in scanning for market and/or economic impact.
I want to start with the event that led to a bear market – the Arab-Israeli war that resulted in an oil embargo in 1973, which quadrupled oil prices and contributed significantly to an economic recession. The devaluation of the dollar around the same time only made matters more difficult.
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I think there are some comparisons to be made between that war and Russia’s invasion of Ukraine, which rattled energy markets but also occurred as inflation was taking off and as the Federal Reserve was engaging in aggressive monetary tightening. The point to be made is that wars can impact one feature of the global economic picture, but it’s the combination with other headwinds that can lead to bear markets.
In looking at other Middle East conflicts in recent history, there are several that did not result in bear markets or recessions. The Six-Day War, Operation Desert Storm, the Iraq war in 2003, and the conflict between Israel and Hezbollah in 2006 all resulted in short-term volatility, but stocks kept going up, and the U.S. and global economy kept growing in each case. There’s a chance that the current conflict could escalate further and involve other global powers, which could have market and economic implications. I’d want to revisit my response if that ends up being the case. But in the meantime, assuming the conflict remains regional, I don’t see an outsize impact on expected U.S. corporate earnings or global economic growth, which ultimately drive equity markets.
A final factor to consider is energy markets, particularly since Israel has increased natural gas exports and given Iran’s potential involvement in the current conflict. For now, Israel’s natural gas facilities are still operational, and Iran has arguably not been a critical component of global oil markets for some time. OPEC+ and the U.S. could easily make up lost output from Iran, but whether that even becomes an issue remains to be seen. We saw oil prices move up in the wake of the attacks, but have since stabilized and remain below September highs.
The conflict is early days so understanding its potential impact is an ongoing exercise. But I would refrain from rushing to the worst-case scenarios or allowing the intensity of the fighting to influence your approach to markets and investing. Markets assess the conflict dispassionately, and investors should do the same.
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• An overview of five significant conflicts since World War II, from Korea to Crimea
• An analysis of each conflict and its economic impacts
• U.S. GDP and S&P 500 figures for key periods of these conflicts
If you have $500,000 or more to invest, request this report today!
Disclosure