Will the Israel War Impact the Stock Market?

Will the Israel War Impact the Stock Market?

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The biggest news worldwide this week is the renewed conflict in the Middle East between Gaza and Israel. Last week over the weekend, news of the conflict broke, resulting in a declaration of war from Israel. Israel’s Netanyahu today said Israel will dismantle the ‘bloodthirsty monsters’ of Hamas, as he threatens a full-scale ground offensive on Gaza. Meanwhile, over the weekend, Iran issued counter-threats — an expanded, full-scale conflict between the two countries. So then, the question is, why isn’t the stock market plummeting this morning?

The War in Israel is Unlikely to Send Stocks Lower

While war is one of the most horrible, tragic things that can happen to humanity, the counterintuitive fact is that the stock market simply doesn’t care. In fact most of the time, US-involved wars lead to a positive return for the stock market. 

Source: PersonalFinanceClub

It isn’t just the above examples, either. When the war between Ukraine and Russia broke out in 2022, the market lost nearly 5%. However, the market recovered in the following two days, and over the next month and a half, the market had risen 5%. Even during conflicts where US citizens were drafted, like the Vietnam War, stocks performed well essentially the entire time. 

However, there is one potential side-effect of the war in Israel that could threaten the US markets: The impact on oil prices. Some analysts believe that, if Iranian involvement increases, the US could begin to enforce restrictions on Iranian oil exports – which could tighten the supply of oil, increasing costs, and subsequently increasing inflation. Additionally, if the conflict between Israel and Hamas leads to a disruption in the Strait of Hormuz (a large oil chokepoint), that too could impact the price of oil. 

The bank warned that supply could be hit if the US were to strictly enforce restrictions on Iranian oil exports or if the conflict between Israel and Hamas led to disruption in the Strait of Hormuz, a big oil chokepoint.

Conflicting Views: Israel War Impact on Oil Prices

Analysts are ultimately at odds on whether or not the Israel war will get to the point where it impacts oil prices. On one side, you have confident sounding comments like this one from Joe DeLaura of Rabobank:

“We’re headed to $100 no matter what this quarter,” said Joe DeLaura, global energy strategist at Rabobank.

A more nuanced take from Ole Hansen, head of commodity strategy at Saxo Bank:

“Prices could easily get a lot worse before we find some stabilization,”

However, on the other end of spectrum sits the analysts of JPMorgan, who said that the war in Israel has had “no immediate impact” on global oil production, and that the war is unlikely to trigger any “substantial” surge in the price of oil between now and the end of the year. Within that view, there are two main points:

1. While Iran is a key player in oil production and export, Israel isn’t. Additionally, no oil is produced in Gaza, the main battlefield in the conflict.

2. Notably, global oil demand is set to glow at a slower rate next year than it usually does — and that could become a trend. As much of the world struggles with higher interest rates, inflation, and difficult economic conditions, demand for oil is set to grow by just 880,000 barrels per day in 2024. That may sound like a lot, but this isn’t even half of the demand expected in 2023 (2.3 million barrels per day). This situation isn’t helped by greater energy efficiency which continues to eat into oil consumption, as reported by the IEA — a phenomenon that will likely grow as the global economy recovers.

So, will the conflict in Israel impact oil prices? 

It depends on who you believe. Since the conflict began, crude oil futures have risen roughly 5%. In order to reach the $100 per barrel “no matter what” figure espoused above from Rabobank, it will have to rise another +15.2%. No small feat, but certainly possible given this week’s increase, and given the market’s reaction to last year’s invasion of Ukraine, which sent oil prices sky-high. Again, that conflict is of course very different, considering Russia’s status as “the world’s gas station” — but it is a recent event that is similar in certain aspects with which we can compare the market’s propensity for large, fear-driven movements.

Now, the final answer:

Will the conflict in Israel impact stocks?

To this, we have a much more clear answer. 

Stocks have shown their ability to shake off conflicts much larger and more impactful than this one throughout history. 

If the market were in a different place technically, this certainly could be the catalyst that would send stocks lower. However, contrary to the views of Wall Street’s permabears (some of whom have been calling for doom and gloom since January of this year), stocks are technically speaking in a solid place right now. 

Consider this:

We’ve made it through the worst performing period of the year for stocks without incurring major technical damage.

We’re now entering one of the best periods of the year for stocks.

The S&P 500 experienced a healthy pullback following its first-half gains, and respected its 200-day moving average before reclaiming an uptrend it has been trading in since October of 2022. 

The QQQ remains at the precipice of a long-term cup & handle formation – a pattern widely considered to be bullish.

According to the CME FedWatch and voting Fed member Harker, the Fed is “very likely” done raising rates.

The market still remains well-off its all-time highs following the 2022 bear market.

Bear markets are typically followed by up-years. 

So then, one last time, will the conflict in Israel impact stocks? Historically, probably not

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