Why Hamas Attack Might Not Slam Stocks Too Much

The horrifying weekend tragedy in Israel does have a financial and economic side, as callous as that might sound. A Middle Eastern war likely will push up oil prices, not good news for the world’s economy, but the impact on stocks should be limited, according to strategists.

The S&P 500 actually advanced Monday, up 0.63%, with monetary developments overshadowing the atrocities in Israel. Observers ascribed the market rise to dovish reactions from Federal Reserve policymakers, spurring hopes that the central bank would curb any new interest rate boosts. The index also was ahead Tuesday morning, by 0. 99%.

Oil prices shot up on the news of Hamas’ attacks on Israel and Israel’s retaliatory strikes. West Texas Intermediate Crude, the U.S. benchmark, rose 4.5% Monday. Crude prices fell back almost 1% Tuesday morning. In a way, the Hamas incursion into Israel is reminiscent of the Jewish nation’s conflict with Arab enemies during the Yom Kippur War in the early 1970s, which spawned the Saudi Arabian-led oil embargo on the West for its support of Israel.

Nonetheless, the world is nowhere near as vulnerable to an oil-induced economic debacle as it was back then. “It would take a major escalation for this conflict to generate a shock comparable to the one in 1973 following” the Yom Kippur War, wrote Jonas Goltermann, deputy chief markets economist at Capital Economics, in a research note. “Back then, the oil price quadrupled over the space of a few months; such an outcome remains a tail risk scenario” nowadays.

This is not to say that the economic and markets fallout will be negligible. One concern is that climbing energy costs could re-ignite inflation, which recently has abated, and ascendant inflation is a definite minus for equities. “If oil prices rise higher for longer, the global economy could feel a resurgence of inflation during a period when investors are hoping inflation is clearly decelerating,” commented Jeffrey Roach, chief economist for LPL Financial, in a note.

Marcus Frampton, CIO of the Alaska Permanent Fund, which invests the state’s oil proceeds, observes: “Any time like this, thoughts are more with the families affected by this tragedy and senseless violence than with markets. With that noted, higher prices at the pump are in everyone’s future and, in my opinion, lower stock markets. This is a negative for the stock market over six to 12 months.”

On the positive side, today there is no united front in the region rallying to Hamas’s side. “Arab states are no longer closely aligned in how they view Israel. Palestinians have few true allies in the region,” wrote Marko Papic, chief strategist at the Clocktower Group. “Saudi Arabia is focused on internal economic development and maximizing its long-term interests. Egypt is not supportive of Hamas. Syria is decimated by civil war. Iran continues to be as anti-Israeli as ever, but is unlikely to risk retaliation by Israel and the U.S. for the sake of Palestinians.”

Right now, the consensus view is that the Israel-Hamas war will not spread.

The model for that outlook is the war in Ukraine, which has not spread beyond Eastern Europe to date and has had just a small effect on stocks. In February 2022, during the buildup to and start of Russia’s invasion of Ukraine, equity markets dipped. But as it become clear that the fighting was unlikely to spread into the rest of Europe, investors’ qualms eased. Meantime, the conflict triggered a quick escalation of oil prices from around $80 per barrel at 2022’s outset to $119 by May that year. Crude then pulled back to the current level of $86.

The fact remains that energy is not as dominant a factor in the world economy as it was a half-century ago. Just as important, the U.S. is now the top global petroleum producer and can meet all domestic needs. Unlike in the 1970s, the U.S. has the comfort of a strategic petroleum reserve. The administration of President Joe Biden has tapped the reserve to offset sanctions imposed on Russian oil, but the administration insists sufficient amounts remain. An analysis by the Federal Reserve Bank of Dallas noted that the inventory level was at a 40-year low, but concluded that this was adequate to meet U.S. needs.

To be sure, wars are never predictable. Investors, not to mention people in general around the world, can only hope that the latest tragic outbreak of bloodshed in the Middle East remains limited in scope and reach, and ends soon.