How Will Israel-Hamas War Affect the Stock Market?

This past weekend, Israel formally declared war on Hamas after the Palestinian militant group launched a surprise attack on the country. Israel responded swiftly, and the resulting escalation of violence has now left over 2,300 dead on both sides, with thousands more injured.

The Israel-Hamas conflict has rattled global markets, impacting everything from stocks and cryptocurrencies to oil prices and airline flights. Stock indexes initially fell on the news, while defense stocks rose. Oil prices went up over 3% due to concerns about potential supply constraints. Major airlines canceled flights to Tel Aviv. Both Bitcoin and Ethereum prices dropped nearly 2%. While markets showed signs of stabilizing on Monday, volatility is expected to continue as long as the fighting persists. Further escalation could have significant economic ripple effects worldwide. Meanwhile, the decades-long Israel-Palestine conflict remains unresolved, with no clear path towards lasting peace.

● l Historically, wars have not had a major long-term impact on the US stock market. Markets tend to rebound after initial drops.

● l The current Israel-Hamas conflict is unlikely to significantly destabilize global markets, as it is a localized dispute in a region where conflict has occurred for decades.

● l Defense stocks tend to rise during wartime due to increased military spending and demand for defense equipment. Lockheed Martin, Northrop Grumman, and other defense contractors gained ground at the start of this conflict.

● l Oil and energy stocks also often increase during Middle East conflicts due to concerns about supply disruptions and rising oil prices. ExxonMobil, Halliburton, and other oil firms rose on news of fighting between Israel and Hamas.

Historically, wars have had surprisingly little long-term impact on the stock market, according to the provided analysis. During World War I, stocks initially fell around 30% when war broke out, but after a six month suspension of trading, markets reopened and the Dow Jones Industrial Average rose over 88% in 1915. Similarly, during World War II, the Dow actually rose 10% after the initial invasion of Poland in 1939. Following the attack on Pearl Harbor, stocks fell only 2.9% before regaining those losses within a month. From 1939 to 1945, the Dow increased 50% overall, even amidst the devastation of WWII.

More recently, the analysis shows how markets have shrugged off potential conflicts like military escalations with Iran and North Korea. After the 2020 U.S. airstrike that killed an Iranian general, the S&P 500 index fell over 7% but rebounded quickly. When Russia invaded Ukraine in February 2022, markets again dropped sharply but regained pre-invasion levels within weeks. While periods of uncertainty often generate volatility, historical data reveals markets tend to be resilient through wars. Industry experts point to factors like investors becoming numb to geopolitical conflicts, the changing structure of oil markets, and confidence that stocks will recover as reasons for continued optimism. Though sectors like defense and energy can benefit from wartime, broader markets have proven adaptive through even extended conflicts. Ultimately, the analysis indicates wars have had little sustained negative impact on U.S. stock markets over the long run.

The outbreak of war between Israel and Hamas following an attack on Israel's territory is tragic, though unsurprising given the long history of conflict in the region. While such geopolitical events often present a dilemma for investors who abhor violence but seek market stability, past experience suggests this war's economic impacts may remain localized.

When Russia invaded Ukraine last year, markets initially fell but rebounded within days, as traders realized the war changed little economically beyond Eastern Europe. Similarly, this new Israel-Hamas war, though morally indefensible, is unlikely to greatly impact the global economy. Regional Middle East conflicts have simmered for decades without major global disruption. The West's reduced dependence on Middle Eastern oil and alternatives like US shale mitigate potential energy market turmoil. As with the response to Russia's actions in Ukraine, economic sanctions against the warring parties may be imposed but a wider conflict appears improbable. Though tragic and warranting strong condemnation, this localized war alone seems unlikely to significantly destabilize the global economy or stock markets. Traders will likely quickly refocus on broader drivers like interest rates and the pandemic recovery.

Governments often ramp up military spending to fund the war effort. This leads to more revenues and profits for major defense companies as they receive contracts to supply arms, vehicles, aircraft, and other gear to the militaries involved in the fighting. Investors recognize this dynamic and tend to bid up shares of defense firms at the first signs of conflict, anticipating the higher sales and earnings to come from wartime military spending.

As major oil companies earn more revenue from higher oil prices, their profits and stock prices tend to rise as well. Investors often buy up shares in big energy firms when conflicts flare up in oil-rich areas, betting that oil prices will spike on supply fears. So the outbreak of fighting tends to send oil stocks higher based on worries over reduced supply triggering much higher oil prices.

War is not inevitable, but happens when societies ignore its immense costs. Leaders pursue war when unchecked and unaccountable to the populace, blinded by ideology, misperceiving the risks due to bias and uncertainty, or unable to make credible commitments amid shifting power. Societies also war when ideologically motivated or failing to constrain biased leaders.

Successful peaceful societies limit autocracy, reduce uncertainty through institutions, minimize misperceptions, and ease power transitions. But peace is threatened when power concentrates unchecked, as this accentuates all reasons for war. The root of any war often appears to lie in too much power in one leader's hands.

While the outbreak of violence between Israel and Hamas is tragic, historical data suggests the economic impacts will remain relatively contained. This localized conflict is unlikely to greatly disrupt the global economy or stock markets over the long term.

However, defense and energy stocks may see short-term gains based on military spending and oil supply fears typical during Middle East conflicts. But broader markets have proven resilient to geopolitical unrest in the past.